Last week, I wrote about how the S&P 500 is setting up for a potentially explosive breakout.
My analysis suggests that many of the other broader equity indexes are also setting up for sharp reversals.
So today, we’ll look at the Dow Jones Transportation Average (DJTA)…
The DJTA is the oldest stock market index in use today – even older than its more famous cousin, the Dow Jones Industrial Average.
It’s also the most widely recognized gauge of the transportation sector… including stocks like FedEx, UPS, Union Pacific, and American Airlines.
(If you’d like a comprehensive overview of all the stocks included in the DJTA, just follow this link.)
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Now that we’ve covered the basics of the DJTA, let’s get into the bullish pattern I see on its price chart…
I’ve highlighted three key things from this chart…
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The red horizontal range lines between 16,418 and 16,588 is my initial upside target (1). The DJTA broke down from this range back in November 2021. Since then, it’s gone on to test it as resistance in December and January.
If prices successfully break higher, then there’s a strong likelihood that we’ll test this range once more. If the index can successfully punch through it, then I’ll provide an update with my next set of targets.
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Next is the bullish price pattern I had mentioned earlier. The pattern is an inverted head and shoulders formation, and they typically take shape near market bottoms.
I’ve labelled the left shoulder, the head, and the right shoulder, and the neckline of the pattern using a blue line (2).
Once prices break out above the neckline, the pattern is considered complete… and so long as prices don’t break below the head of the pattern, this setup will remain valid.
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Finally, we have bullish divergence take shape in the Relative Strength Index (RSI) at the lower portion of the chart (3). Bullish divergence occurs when prices continue to make new lows, but the indicator starts to make new highs.
The RSI bottomed out on February 24 and has been trending higher since. This is the kind of supporting technical analysis I like to see when assessing a potential market bottom.
The combination of this inverse head and shoulders pattern with the bullish RSI divergence has a lot of promise.
Of course, all eyes will be on the FOMC meeting taking place later this afternoon…
But if the market reacts positively to the meeting, then I can see this trade playing out quickly.
Happy trading,
Imre Gams
Analyst, Market Minute
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