Dow Transports Validating Higher Stock Market Prices

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Dow transports

Dow Transports Support Dow 30K outlook?

As we stated in the last update, the Dow utilities are now trading in the extremely overbought ranges, and it’s time for them to let out some steam. If the pullback is strong, then the Dow is likely to also experience a strong pullback as per the TI Dow Theory.  In the last update, the targets of 9300 to 9600 ranges were for the Dow transports.  The Utilities (as shown in the above chart) are likely to test the 802 to 819 ranges with a possible overshoot to the 765 to 774 ranges.

Dow Transports Support Dow 30K outlook

Right off the bat, we are going to state that we are in favour of a stronger correction as it will create a lovely buying opportunity unless the trend changes. If the trend exhibits any signs of weakness, we will notify everyone immediately; for now, the trend is showing absolutely no signs of weakness

Dow Transports weekly charts

The weekly chart of the Transports illustrates that they are now at a zone of strong resistance; this resistance will eventually be overcome as the transports are trading in the extremely oversold ranges on the monthly charts as shown further below.  The transports need to close above 11250 on a monthly basis. If they can achieve this, then former resistance will turn into support.  A breakout could push this index as much as 1800 to 2400 points higher from the breakout zone; in this case, the breakout zone would be 11250.

Dow transports support higher prices

If the utilities close below the 801 to 804 ranges, then the first breakout attempt by the Dow transports is likely to fail. This will convince everyone that the transportation sector is going to breakdown, but precisely the opposite will transpire. If the Dow transports trade below 10500 for three days in a row, the odds of a move to the 9300 to 9600 will spike significantly. If this comes to pass, aggressive traders can load up on stocks in the transportation sector. Some stocks that come to mind are WERN, PTSI, FWRD, HTLD, etc.

Transportation Sector Expected To Outperform Markets

Overall we expect the transportation sector to outperform the markets.  When a sector is hated, and the trend is up, it’s probably the perfect time to establish long positions in that sector.

The ideal setup would call for the Dow utilities to experience a sharp pullback so that the Dow can follow in its footsteps and in doing so create a fantastic opportunity. Unless the trend changes, one should completely ignore the urge to panic if the market’s pullback strongly next year. The suggested course of action would be to break out a bottle of your favourite beverage (alcoholic or non-alcoholic) and celebrate.

Final Thoughts 

Based on the trend, market sentiment and the state of Dow (trading in the extremely oversold ranges),  the favoured outcome would be for the Dow utilities to experience a sharp pullback. Short term traders can watch the 801 to 803 ranges; a breach of this zone will indicate much lower prices.  If the utilities pullback strongly the Dow Industrials and Transports are likely to take the same path and in doing so this will create a lovely buying opportunity for 2020.

The Dow is trading close to 28K again and if one looks at the sentiment, one would be inclined to think that it was trading closer to the 26.5k ranges. Neutral sentiment has inched up another two points and its almost at a 3 month high. Bullish readings are well below their historical average of 39. Overall market sentiment is indicating that a strong pull back if it comes to pass, has to be viewed as an opportunity.  Market Update Dec 10, 2019

The Dow is now trading well above 28k, and bullish sentiment is still trading below its historical average. In short, we can conclude that next year’s market action will catch 90% of experts with their pants down. All the experts, even those who got the first part of this bull market right, are wearing their emotions on their sleeves. How do we know? All one has to do is pay attention to their political bias? If you have a bias (be it politics or finance), your vision is clouded and hence your analysis.

Some subscribers have asked us why we don’t short the markets; our focus is on the long term trend. While it looks like it is easy to gauge the direction of the trend, we can assure that it’s not. We don’t want to be in a position where we are stuck looking at two opposing trends in two different time frames and in doing so miss out on both ends. This reminds us of the story of the donkey that kept looking for a tastier haystack; in the end, the idiot died of starvation. 

Hence, while the trend is up, we will focus on the long trades and vice versa.  Finally, note the market update is a tool that can also be used to meet your own needs; thus if you have time and are comfortable with shorting the market you may do so. The best way to minimize the risk factor when shorting the market is to use put options; one knows upfront how much one could potentially lose.  Market Update Feb 11, 2020

Market Update March 2020

In short, there is no reason to panic, and if this selling continues at this rate it will lead to a monstrous buying event and here is the kicker, all those that panicked will miss it, for once panic sets in; it is very hard to differentiate between opportunity and disaster.  Think back to 2008, and look at how many missed the boat because the assumption was that the markets could only go lower.

Now given the intensity of the current sell-off, the markets are likely to mount a rally, the first attempt usually fails, and if history is to be trusted then when this rally fizzles out, it should lead to another downward wave, that could take the market to new lows on an intraday basis.  If the pattern is strong enough, we could issue either a short term put play or open up strangle position. This is where one opens up both a call and put but with different strike prices.

Don’t forget to keep a trading journal; the best time to take notes is when blood is flowing freely on the streets.

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