TRANSPORTS LEAD MARKET LOWER -- AIRLINES LAG IN 2007 -- CONTINENTAL TEST KEY SUPPORT -- RATE CONCERNS HIT EUROPE -- SPAIN LAGS IN EUROPE -- RISING RATES FAIL TO SPARK THE DOLLAR
TRANSPORTS TAKEN TO TASK... The Dow Transports led the market lower on Wednesday with weakness in Airlines, Rails and Truckers. This key Dow average broke resistance just last week and came crashing back down over the last three days. The pattern in May looked like a consolidation and the breakout at 5250 signaled a continuation higher. A strong breakout should hold and the sharp decline back below 5250 is not a good sign at all. The Dow Transports still has support around 5100 from the mid May low and the 50-day moving average. This is the next level to watch and a break below 5100 would be medium-term bearish. The Dow Jones Transportation Average is an important yardstick because the transportation network is the backbone of the economy.
Chart 1
AIRLINES, RAILS AND TRUCKERS CONTRIBUTE... The next three charts are from the Dow Jones Industry groups and these represent the three key groups within the Dow Transports. They are the DJ US Airline Index ($DJUSAR), the DJ US Trucking Index ($DJUSTK) and the DJ US Railroad Index ($DJUSRR). Airlines by far are the weakest of the three and Railroads are the strongest. Truckers fit somewhere in between.
The Airline Index peaked in January and declined steadily over the last five months. The index broke key support at 140 with a sharp decline in February and then broke its 200-day in March. The 50-day crossed below the 200-day in May and Airlines remain both absolutely weak and relatively weak.
Chart 2
The Trucking Index bucked the Airline Index by bottoming in late January and moving to new highs in April. The index gapped up at the end of April, but this gap did not hold and it is looking like an exhaustion gap. The index immediately filled the gap and then consolidated around 355 in May. Truckers were weak today and the index is testing its 50-day moving average. The next support level is around 330 from the 200-day moving average and broken resistance.
Chart 3
The Railroad Index bottomed in January and moved to new highs just last week. These stocks were powering the Dow Transports last week. The overall trend remains up, but the index came under selling pressure the last three days. The index has support around 480 from its 50-day and support around 470 from the early May low.
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CONTINENTAL TESTS 200-DAY... Within the Airline Index, Continental Airlines (CAL) is testing its 200-day moving average today and further weakness would break another support level. The stock broke neckline support of a head-and-shoulders reversal pattern at the end of February and then consolidated in March. The pattern since mid March also looks like a head-and-shoulders, but this one is a continuation version. That's right. The head-and-shoulders pattern can be a continuation or a reversal pattern. It depends where in the trend it forms. A head-and-shoulders that forms after an advance is a reversal pattern. A head-and-shoulders that forms after a decline is continuation pattern. Keep in mind that both require confirmation with a neckline support break. CAL is on the verge of a neckline support break at 36 and this would target further weakness below 30. Ouch.
Chart 5
RATE RISE HITS EUROPEAN STOCKS... The U.S. is not alone when it comes to interest rate fears. The European Central Bank raised its base interest rate to 4% today and key European stock indices fell sharply. The FTSE (UK) lost over 1%, the DAX (Germany) was down over 1.5% and the Madrid General (Spain) fell over 1.5%. This marks the third day of weakness for these three indices. Despite three down days, the overall trends are still up as the FTSE, DAX and Madrid General all hit new highs just last week. Sounds a lot like the U.S. equity markets.
The DAX is the strongest of the three amigos and the Madrid General is the weakest (least strong). The FTSE and DAX broke above their February highs in April and continued higher in May. In contrast, the Madrid General failed to break resistance in April and fell back below 1600. The index moved back above resistance in late May, but fell back below this breakout in early June and is clearly not as strong as the other two. The laggards on the way up are likely to lead on the way down.
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US DOLLAR AND RATES DIVERGE... Rising interest rates and low inflation are usually bullish for a currency, but rising rates have not helped the US Dollar Index. As noted in the Murphy Market Message over the last few weeks, interest rates in the U.S. have been rising and rising rather sharply. However, the US Dollar Index is not impressed and actually broke down over the last few days.
The first chart shows the 10-year T-Note Yield ($TNX) and its recent surge to 5%, which is the highest level since August 2006. Despite a big advance in U.S. interest rates over the 2-3 months, the Greenback has remained weak and recently broke rising wedge support. This break signals a continuation of the existing downtrend and the index is poised to test long-term support around 81-81.5. The inability of the US Dollar Index to rise in the face of rising interest rates suggests that other drivers are at work. Perhaps the Forex market smells inflation.
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