I hope everyone had a good weekend. I’m currently snowed in, so I’ll be working from today unless a plow comes through my neighborhood anytime soon.
Traders spent the weekend waiting to see how futures would react to the news out of Cyprus. We got a pop in pre-market but as I write this, the S&P is negative for the day. One index that has my interest today is the Dow Jones Transportation Average. Transports have helped lead equities higher off the Nov. ’12 lows and have been outperforming the S&P since September.
Transports have put in a nice rising trend line once it broke out from its channel. We discussed the trading range created between June and December a few times last year (here and here), which gave us a nice level to watch for a breakout. This trend line is what many traders will be watching if we see any continued weakness and a break of 6,100. Like I’ve mentioned with the S&P 500, The DJ Transport Avg. is seeing its momentum set lower highs while price has rocketed higher, putting in a negative divergence. I’ll be watching the 50 level on the Relative Strength Index as a sign of momentum breaking down, as that’s the level tested back in Feb.
In the bottom panel of the chart we can see the relative performance between the iShares Transports ETF ($IYT) and the SPDR S&P 500 ETF ($SPY). The ratio has done a pretty good job at finding support at its 50-day moving average. When we get a break with follow through of the 50-MA then we can get a clue of a possible trend change between these two indices and a sign that the equity leader is having some trouble.
On Friday I discussed the charts that could end the rally. Alongside the setups I mentioned, it’s important to keep an eye on sectors and names that have led the market rally. Transports are definitely one of those names and can act as the canary if things were to weaken.
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