The Transportation Index (NYSE:IYT) started moving higher out of consolidation about a month ago. Since that move started it has risen more than 12% in a month. That is a strong move. Coming into the Christmas holiday weekend it seems to be a bit tired, printing back-to-back doji’s Wednesday and Thursday. The common trader perspective on these is that they are reversal candlesticks.
In fact they signal indecision, not a reversal. Think of it this way. A stock opens at a price level and trades higher. As it reaches the highs sellers take control and push the stock back lower. The sellers continue to control the price and push it below the open price. But then buyers step in and eventually overwhelm the sellers, moving the price back higher. And when it reaches to opening price equilibrium is reached again. Nobody has won, nobody has lost. Indecision.
Indecision then can be worked out either to the upside or to the downside over time. In the short run that suggest that the Transportation Index can continue higher. There are several aspects of the short term chart that support that path. The momentum remains strong and only narrowly overbought with the stock under accumulation. But often it is the longer time-frame that can help see the path. The chart below shows that longer perspective for the transports. It gives the price of the Index on a monthly basis.
The chart starts with a corrective Elliott Wave pattern from 2003 through to the low in 2009. But then it started higher. The impulse Wave has 3 waves higher mixed with 2 corrective waves. So far the Transports have seen one of the waves higher complete and a pullback in the corrective wave follow. They are now working on the Wave III higher, which has a target to 10950. This is measured from the smaller wave (iii) added to the last low. Yes waves are fractal. So the end of this Wave III is also wave (v) on the smaller scale. Does that mean the end is upon us for the run in the Transports?
Not at all. In fact Wave count itself suggests there is a corrective Wave IV. A viewing of Wave II would suggest that Wave IV would be flat as opposed to the downward nature of Wave II. So maybe Wave IV goes sideways for a while and then Wave V begins. Using 10950 as an estimate for the top of Wave III and assuming a flat Wave IV, gives a range of 14500 to 15400 to the ultimate top. This assumes that Wave V is at least as long as Wave I and not longer than Wave III, but it could keep going as well.
Another estimate can be made by looking at the AB=CD pattern. Should it extend to a 3 Drives pattern there would be a third leg higher in the series. The first was a move of 3500, with the second a double of that or 7000. A third leg in the series would then look for a 14000 point move or to 20500. I know you are all shaking your heads right about now. Momentum is hot, verging on overbought, blah blah blah. But look at the last time that momentum became overbought in March 2013. The Transports continued higher another 3000 points before the ultimate top.
I do not know how long the drive will continue. But pulling back from the day-to-day traffic suggests that any stall or pullback right now is nothing more than a pull into the rest stop for a while before continuing on the trip. As we wind up the year, heading into the holiday weekend. I hope you enjoy your trips to see friends and family. It has been a great year in the markets and hopefully in you life as well. Lets look to make 2018 even better. Merry Christmas and Happy Holidays to all!
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