DOW INDUSTRIALS TRACES OUT BULLISH CONTINUATION PATTERN -- TRANSPORTS CONFIRM NEW HIGH IN INDUSTRIALS -- FEDEX AND UPS POWER THE TRANSPORTS -- EXPEDITORS BOUNCES OFF VOLUME-BY-PRICE ZONE -- HOME CONSTRUCTION ISHARES HITS SUPPORT AGAIN
DOW INDUSTRIALS TRACES OUT BULLISH CONTINUATION PATTERN... Link for today's video. The Dow Industrials has been quite choppy over the last seven weeks, but the overall pattern looks like a cup-with-handle. Popularized by William O'Neil of Investors Business Daily, the cup-with-handle is a bullish continuation pattern, which means it forms within a bigger uptrend. Chart 1 shows the 2014 highs marking rim resistance and a breakout would signal a continuation higher. The height of the cup is added to the breakout level for an upside target. In this example, the upside target would be in the 17,900 area (16600 + 1300). The handle portion of the pattern could also be considered a flag of sorts. Notice how the Dow surged from 15300 to 16500 and then consolidated with a trading range. A flag after a sharp advance is also a bullish continuation pattern.
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Chart 1
The indicator window shows the Negative Volume Index (NVI) in a strong uptrend and at a new high. This volume-based indicator is a little counter intuitive because it rewards low-volume advances. Paul Dysart, the creator, theorized that "informed" money is active on low volume days and "uninformed" money is active on high volume days. An advance on low volume suggests that the "informed" money is buying and this is bullish. A new high in NVI indicates that the up days are built on low volume and informed buying. You can read more on this indicator in our ChartSchool.
TRANSPORTS CONFIRM NEW HIGH IN INDUSTRIALS... Chart 2 shows the Dow Transports taking off last week and moving to a new all time high today. Note that both the Dow Industrials and Dow Transports hit new highs this month to affirm Dow Theory as bullish. At this point, I would use the early February lows for the next Dow Theory signal. A break below these lows by both the Dow Industrials and Dow Transports would put Dow Theory on a sell signal. These lows are 7 to 9% below current levels. Keep in mind that Dow Theory is not a short-term timing system, but rather a long-term trend-following system. I would, therefore, not base a Dow Theory signal on the lows from March and February, even though these lows can be used to mark first support.
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Chart 2
FEDEX AND UPS POWER THE TRANSPORTS... Before looking at some individual stocks, note that we are in the middle of earnings season and stocks reporting earnings are prone to above average volatility. The Dow Industrials and Dow Transports are price-weighted averages, where the stocks with the highest prices carry the most weight. FedEx (> $135) is the second most influential stock in the Dow Transports and UPS (> $95) is the fourth. These two companies have very similar businesses and represent great proxies for the global economy. Uptrends in these two would suggest strength in the global economy and this would be positive for the market overall, especially large-caps with global operations. Chart 3 shows FedEx (FDX) hitting a new high at yearend and then forming a large triangle this year. As a large bullish continuation pattern, a breakout at 140 would signal a continuation of the bigger uptrend and target new highs. Chart 4 shows UPS hitting a new high in late December, retracing 50-62% of the September-December advance and then working higher since early February. The advance may be gaining steam as the stock put in its highest three day surge since October.
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Chart 3
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Chart 4
EXPEDITORS BOUNCES OFF VOLUME-BY-PRICE ZONE... Expeditors International (~ $40) does not carry as much influence on the Dow Transports, but the company is a global logistics and services company with strong ties to the global economy. Chart 5 shows Expeditors International firming in the 39 area and surging over the last four days. Overall, the stock surged to a new high in October and then corrected from November to March. I am calling this a correction because the new high points to a long-term uptrend. The long volume-by-price bars and the 62% retracement point to support in the 39 area. Notice now EXPD firmed in the 39 area for eight weeks and then surged to resistance with good volume. Also notice the selling climax in late February when the stock fell on extremely high volume and then firmed the very next day with similar volume. Throw in the March volume spike and this is why the volume-by-price bars are the longest in the 38.5 to 40.5 area.
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Chart 5
HOME CONSTRUCTION ISHARES HITS SUPPORT AGAIN... The Home Construction iShares (ITB) got a bounce in early April, but this bounce faded as the ETF declined back to the support zone in the 23.5 area. Even so, the overall picture remains unchanged. I still consider the March-April decline as a correction within a bigger uptrend. Chart 6 shows ITB breaking out in late December and surging to a 52-week high in late February. The March-April decline retraced around 50% of the prior advance and returned to broken resistance. The retracement amount and broken resistance suggest that support is at hand. Also notice that ITB formed a falling wedge, which is typical for a correction. The ETF is firming once again in the support zone and I am marking first resistance at 24.50. A move above this level would break wedge resistance and signal a continuation of the bigger uptrend.
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Chart 6
The indicator window shows the StockCharts Technical Rank (SCTR) breaking below 40 in late March and remaining weak in April. The blue band marks the 40 to 60 range. A break above 60 indicates relative strength in ITB, while a break below 40 signals relative weakness. Notice how the SCTR failed just below 60 in early April and turned down over the last two weeks. A break above 60 is needed to put ITB back on the relative strength track. You can read more about the StockCharts Technical Rank (SCTR) in our ChartSchool.
USG BOUNCES NEAR SUPPORT ... Sheetrock king US Gypsum (USG) is perking up with a bounce just above its support zone. Chart 7 shows the stock breaking out to new highs in January and continuing higher in February. USG then corrected with a falling channel that retraced almost 62% of the prior advance. Also notice that broken resistance turns support in the 29 area. The stock reversed just above this support zone and is challenging the channel trend line with a surge today.
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Chart 7
DHI SHOWS RELATIVE STRENGTH... Homebuilder DR Horton (DHI) is also perking up with a bounce off support today. Chart 8 shows the stock breaking out in December and moving to 25 in late February. The stock then pulled back rather sharply in March, but found support in the 50-62% retracement zone over the last five weeks. I am impressed with DHI for two reasons. First, the stock is getting a pretty strong bounce off support today. Second, DHI is starting to show relative strength as the StockCharts Technical Rank (SCTR) surges above 60 again. DHI is showing relative strength because it held above its late March low last week. In contrast, note that ITB and SPY broke their late March lows last week.
