By Jim Donnelly, Olson Global Markets
Following Friday’s employment report for the month of July, the Dow Jones Transportation Index (DJT) closed the week just below long-term trend line resistance that dates back to April 1998. In addition, overbought technical conditions are clearly present on long-term charts at this time. As a result, this technical set-up represents a big red flag of caution.
That being said, a solid break above key resistance (now at the 6,687 level) would be an impressive sign of strength that would likely catch a number of investors off sides, if it were to occur. Moreover, the Dow Jones Transportation Index is considered a key element to the Dow Theory, since it purports that transportation stocks must lead industrial stocks in order to advance a bull trend. This facet of Dow Theory implies that the movement and delivery of an increased amount of goods suggests that industrial producers are manufacturing an increased amount of things; or that raw materials are being shipped to destinations that need those materials in order to make more things.
Some observers argue that the increase in domestic oil and natural gas production is one reason for a rise in the use of railways and trucks since the current pipeline system is not currently equipped to handle the production increase. Others will also stress that the increase in transportation services of all kinds more than offset a reduction in the demand for raw materials from China, which itself is underscored by weak commodity prices.
In any event, this is a key test of an importation resistance level of the DJT that will likely determine the next phase of the direction of equity prices in general.