Thursday, November 7, 2013

The Long-Term Trend vs. Long-Term Resistance

Fans of Dow Theory watch the Dow Jones Transportation Average (TRAN) for confirmation of moves in the indrustrials, and TRAN theoretically acts as a barometer of economic activity.  If the economy is doing better, then the amount of goods being produced and consumed increases, which means more goods need to be shipped around the globe -- which is then, of course, good for the transport companies.

That was back in the Old World, though.  The John Houseman world, where "they made money the old-fashioned way: they earned it."  In today's QE world, it's hard to say how much equities relate to the actual economy.  It used to be the economy had an impact on liquidity: solid economies produced additional liquidity, while bad economies caused liquidity to dry up.  Excess liquidity generally leads to rising asset prices, so good economies used to equate to up-trending markets.

But nowadays, the motto of the world's Central Banks is:  "Economy?  ECONOMY?  We don't need no stinkin' economy!!!"  So TRAN's current price may have less to do with the amount of tangible goods being shipped, and more to do with the global liquidity picture.  Economic fundamentals are about as dated as the big hair bands in the 80's, but probably less relevant.

Anyway, TRAN is approaching a long-term resistance zone.  The fractal is similar to late 2009-early 2010.  The "most obvious" wave count suggests the market may bounce along the underside of the channel line over the coming months, but there are other options.  Frankly, this isn't the chart I worked for hours on (which I alluded to yesterday), this is a very simplified version of it -- I can't bring myself to publish that chart just yet.  Stay tuned.


TRAN isn't the only market approaching resistance; the Dow Jones Industrial Average (INDU) has reached a similar zone:

Last week, we looked at the Wilshire 5000 (WLSH), which is also in a similar position and is approaching long-term resistance.  If bulls can muscle through, it becomes a whole new ball game, but it's just too early to assume that outcome.  Markets like to make us stupidly bullish just as they hit resistance levels (and stupidly bearish as they hit support), so we forget all about those levels.  I'm avoiding the temptation to do so here.

The S&P 500 (SPX) chart is largely unchanged for the past few sessions, though I added a signal to watch on the chart below:

In conclusion, I realize that everyone wants to jump on a bandwagon here (bullish or bearish) -- but sometimes a key to successful trading is to be more patient than the next guy.  I feel we're still in a battle zone.  Obviously, one side will win -- and the folks that picked that side early will be genius in retrospect, but as I see it, the battle of the long-term trend vs. long-term resistance is still unfolding.  Trade safe.

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  1. Its been fascinating watching this battle; so many interesting aspects scattered across the market. Thanks for the TRAN chart.

  2. Mate, great calls. Thank you for welcoming me in the chat room, am loving it. You have some great people in there. Love how peaceful and friendly it is.