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January 13, 2006
Transports Losing Momo, Utilities Holding Support and Value Line Leads the Way
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The Dow Transports are not off to a hot start in 2006, but the Average is still holding support and still bullish overall. The Average broke big resistance at 3900 in early November and surged to 4300 by the end of the year. The December reaction low at 4050 is the first level to watch for signs of trouble. As long as 4050 holds, the bulls are in firm control. I am, however, concerned about a negative divergence in RSI. The indicator moved above 70 in November and failed to break 70 in December. This lower high formed a negative divergence and shows warning upside momentum. Further weakness below 50 would be bearish for momentum.
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Well, what’s it going to be? The Dow Utilities surged on 3-Jan and then traded flat the next seven days. The rising channel keeps the medium-term trend bullish, but the lack of follow through is disconcerting. A trendline break and move below 400 would be bearish. I am also using RSI for confirmation. RSI broke the October trendline in late December, but quickly recovered. Further weakness below 50 would be bearish. Should the Average hold support, look for a break above the January highs to open the door to higher prices. In addition, the bulls should look for RSI to hold above 50.
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The Value Line Arithmetic Index ($VAY) is one of the broadest market indices around. It encompasses 1700 stocks and is unweighted. This makes it representative of the market as a whole, regardless of market capitalization. The index broke resistance at 1900 and this level turned into support. After a December consolidation, the index broke resistance to signal a continuation higher. My upside target is the upper channel trendline (2080) by early February. A move below consolidation support at 1900 would negate this bullish prognosis.
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Posted by Arthur B. Hill at January 13, 2006 06:20 AM