This is Why I Love the Transports
- Posted by JC Parets
- on July 16th, 2012
It’s very simple:
“The more times that a level is tested, the higher the likelihood that it breaks”
In other words, if we know there is supply at a given level (or resistance as we like to call it), every attempt to break through that supply zone eliminates more and more supply. Put another way, if there are sellers at a given level, then every time price gets up to that zone, more and more willing sellers will sell. Then eventually there comes a point where anyone willing to sell at that price has already sold and all we’re left with are buyers. That’s when prices explode higher.
Then down the road, those former resistance levels (ceiling) becomes support (or new floor for prices). This is what we call polarity.
So in the case of the Dow Jones Transportation Average, we’re watching this phenomenon happen right now. Last month we put up a bullish post on the transports from a longer-term perspective. Today we’re looking at just the past year.
In the chart below, we drew two trendlines from last year’s important peaks. Regardless if which one you’re focused on, the Transports have tested these trendlines 6,7,8 times. This is what the young kids call, “crazy amounts of resistance”:
Remember, “the more times that a level is tested, the higher the likelihood that it breaks”. And because of that, the chart above is screaming to me that a breakout is almost inevitable. The bullish divergences in RSI (marked by blue dashed lines) have preceded higher prices in the past and could be the catalyst to take the trannies much higher this time around.
And finally, from a risk management perspective, I would be watching this upward-sloping 200-day moving average (right now around 5050). If we start to see prices fall below those levels then we would have to reevaluate our short-term bullish stance.
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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) and is a member of the Market Technicians Association. More
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