DOW BECOMES MOST OVERBOUGHT SINCE JULY 2011 -- DOW TRANSPORTS CONTINUE TO LAG DOW INDUSTRIALS -- AIRLINES AND RAILROADS WEIGH ON TRANSPORTS -- TRUCKING INDEX BREAKS CONSOLIDATION RESISTANCE
DOW BECOMES MOST OVERBOUGHT SINCE JULY 2011... Link for todays video. Led by the finance sector, the Dow Industrials surged above 13000 to record another new 52-week high this year. New 52-week highs occur in uptrends, not downtrends. Moreover, this new 52-week high is especially impressive because Apple is not in the Dow. Yes, the Dow did it without Apple. The yellow area on the chart marks the first support zone to watch. Broken resistance from the May and July highs turns into first support. This level is further confirmed by the lows in mid February and early March.
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Chart 1
Even though there is nothing but uptrend on this chart and there are no signs of weakness, one indicator suggest that the Dow is the most overbought since early July. The indicator window shows the Commodity Channel Index (CCI) moving above +200 for the third time in the last 12 months. Readings above +100 are common, but readings above +200 are relatively rare. Note that the Dow peaked a few days after CCI exceeded +200 in late April and late June.
DOW TRANSPORTS CONTINUE TO LAG DOW INDUSTRIALS... While the Dow Industrials hit a new high this week, the Dow Transports fell well short of its early February high and failed to confirm. Dow Theory is built on the premise of confirmation and a bull market is healthy when both Averages forge higher peaks. Failure by one or the other suggests that something is amiss. This non-confirmation is not a Dow Theory sell signal though. A Dow Theory sell signal triggers when both Averages break below their prior troughs.
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Chart 2
Chart 2 shows the Dow Transports breaking its October high for the most recent bullish confirmation. Note that the Dow Industrials broke a similar resistance level around the same time. The bull signal was alive and well throughout January and into early February, but the two started to stray as February wore on. The Dow Industrials moved to new highs in early March, but the Dow Transports remained well below its prior peak. This non-confirmation is a warning sign for the bulls, but it is not enough to bring out the bears just yet.
AIRLINES AND RAILROADS WEIGH ON TRANSPORTS... There are four key groups within the Dow Transports: Airlines, Air Freight, Railroads and Truckers. Two stocks dominate the Air Freight group: UPS and FDX. UPS hit a new 52-week high this week, but FDX remains below its February high and failed to confirm the new high in its chief rival. Outside of Air Freight, chart 3 shows the DJ US Airline Index ($DJUSAR) plunging since early February. The index was looking good with the breakout in late January and showing relative strength. The breakout failed to hold and the index is back to underperforming. The indicator window shows the Price Relative ($DJUSAR:$SPX ratio) testing its November low. This ratio rises when the Airline Index outperforms and falls when the Airline Index underperforms.
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Chart 3
Chart 4 shows the DJ US Railroad Index ($DJUSRR) hitting resistance near the July high and falling sharply the last five weeks. The index broke support in mid February and continued lower this month. Notice that the index already erased yesterdays gain with a sharp loss today. The indicator window shows the Price Relative moving from a new high in early January to its September low this month. Railroad stocks are seriously underperforming the broader market. Those looking for a reason might point to coal shipments, which account for over 20% of railroad revenues. Chart 5 shows the DJ US Coal Index ($DJUSCL) breaking triangle support and moving towards a 52-week low this month.
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Chart 4
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Chart 5
TRUCKING INDEX BREAKS CONSOLIDATION RESISTANCE... It would be easy to blame high energy prices for weakness in airline stocks, but this would not explain the eight month high in the DJ US Trucking Index ($DJUSTK). Chart 6 shows this index breaking consolidation resistance with a surge above 400 on Tuesday. The index fell back on Wednesday, but the breakout is holding for the most part. Admittedly, there is a larger, and potentially, bearish pattern at work here. Notice that the index is stalling near the 61.80% retracement mark and resistance from broken support. Also note that a rising wedge is taking shape and the index is underperforming the S&P 500. Despite these potential negatives, we have yet to see an actual breakdown and signs of serious weakness. Yes, the bulls still have the edge on this chart. A move below the February lows would break support and change all that.
