Transports Chart Provides Cause for Caution

Investors should note that DJT sold off days before the S&P during January's harsh correction

by Bernie Schaeffer

Published on Sep 25, 2018 at 8:51 AM

The late-week action in the S&P 500 Index (SPX) was surely encouraging for technical analysis-oriented traders, as the broad-equity benchmark on Thursday gapped convincingly away from the round 2,900 level's recently magnetic pull -- and on Friday, the S&P managed to build on that bullish momentum in the early innings of the session. It was in this manner that the index finished out the week with new closing and intraday record highs (on Thursday and Friday, respectively), as U.S. stocks continue to shrug off concerns about any potential lingering impact from the ongoing trade dispute with China.

The slightly more sobering side of this technical achievement is that the S&P now enters the week ahead -- a week in which the Federal Open Market Committee (FOMC) is widely expected to announce an interest rate hike -- staring up at the half-century 2,950 mark. And if there are two things that regular readers of our Todd Salamone's weekly Monday Morning Outlook column can tell you with certainty, it's that (1) the S&P tends to hesitate around half-century marks; and (2) the equity benchmark is also quite likely to underperform its typical returns in the month immediately following a Fed rate hike.

Having effectively ruined the celebratory mood, we'll now turn our attention to another round number worthy of note -- specifically, the 11,600 region on the Dow Jones Transportation Average (DJT). The transports index stopped just short of this century level at its session high of 11,599.60 on Sept. 12, then went on to cross above it at its Sept. 14 intraday record peak of 11,623.58. While DJT crossed 11,600 on an intraday basis in Friday's session, the Sept. 14 high has not yet been surpassed, and this level has yet to be surmounted on a daily closing basis.

So, while DJT's "congestion" at this round number has lasted only just over a week now, the index's stagnation late last week -- even as the broader equity trackers, including the Dow Jones Industrial Average (DJIA), popped higher -- caught our attention.

Back in January, DJT hit its closing high of 11,373.38 on Jan. 12, one session before that month's intraday peak of 11,423.92 was reached -- though DJT closed the next trading day, Jan. 16, sharply lower. The index then managed to string together a four-session win streak, but ultimately topped out on Jan. 22 just shy of its Jan. 12 closing level. DJT rolled over on Jan. 23, gapped lower on Jan. 24, and continued tumbling into its Feb. 9 intraday low.

The S&P, meanwhile, didn't reach its January intraday and closing high of 2,872.87 until the 26th of the month -- two days after DJT's bear gap -- before rolling over on Jan. 29 (the next trading day) and gapping down hard on Jan. 30. Like the transports tracker, the S&P hit its reigning year-to-date intraday low on Feb. 9.

The phrase "canary in a coal mine" may be too dramatic (and perhaps too archaic, for that matter) to describe the relationship between DJT and SPX, but the late-week exhaustion in transports is a red flag right here and now, from our perspective. Combined with a looming half-century level for the S&P and a likely Fed rate hike coming down the pike, we'd recommend maintaining a healthy sense of caution heading into this week.

djt daily chart 2018

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, September 23.

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