Is The Transportation Index Setting Up A Topping Pattern?

The Transportation Index, which typically leads the US stock market by 2 to 4+months, has been unusually aligned with the S&P 500 over the past 8+ months. Recently, though, the Transportation Index has rallied up to recent new all-time highs (over the past 9+ months) and has rotated lower – below resistance near 11,440 (the MAGENTA LINE on the first chart). Our researchers are warning us that any continued breakdown below this level could prompt a bigger downside market move.

IS RECENT ROTATION A TOPPING PATTERN OR JUST CONSOLIDATION?

Currently, the US stock market has rolled into a sideways/topping pattern. After the peak in metals setup near August 7, 2020, the US stock market continued to rally a bit higher, then rotated lower on September 3, 2020. The Transportation Index rolled over on September 3 but climbed higher less than 5 trading days later – breaking above the highs set before the COVID-19 peak. 

We’ve suggested a “Bull Trap” pattern may be forming in the major markets and we’ve urged traders to cautious regarding the new price highs and appearance of a continued upside price rally. The Bull Trap pattern sometimes called a “Scouting Party”, happens when price breaks above resistance (or below support) briefly in an attempt to establish a new trend. If price fails to find support after breaking above the previous resistance level, then it typically rotates lower and collapses back below the resistance level (attempting to find a lower support level).

If our research is correct, the recent rotation in the Transportation Index may suggest a Bull Trap pattern has setup and completed (with price falling back below the 11,440 level). If this trend continues, we may see a much bigger downside price move where price attempts to find support near 9,800 or 9,200.

This Daily Transportation Index chart highlights our proprietary Fibonacci Price Modeling system and the key resistance level near 11,440 (in MAGENTA). It also shows the Bull Trap setup near the recent highs. Past Fibonacci Price Trigger levels near 9,800 and 9,200 suggest any downside price move may target these levels as current support.

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