Dow Transports in Correction Territory; Other Major Stock Indexes Not Yet Negative

NEW YORK (TheStreet) -- Given negative technical indicators for the Dow Jones Transportation Average, there is no longer a bull market for stocks, although the technical chart patterns are not yet negative for the other four major averages.

To signal a potential stock market correction, all five major averages must end the month on Friday below their key weekly moving averages with technical momentum declining below the overbought threshold of 80.00.

Here are the updated profiles for the five major averages followed by the daily and weekly charts for the Dow Transports.

The Dow Jones Industrial Average closed at 18,041.54 on Tuesday, up 1.2% year to date and 1.7% below its all-time intraday high of 18,351.36 set on May 19. Tuesday's close was below the key weekly moving average of 18,080, but the weekly momentum reading is projected to be 80.51, which is above the overbought threshold of 80.00. Additional weakness over the next three days is required to pull momentum below 80.00, which would result in a negative weekly chart.

The Standards & Poor's 500 Index closed at 2,104.20 on Tuesday, up 2.2% year to date and 1.4% below its all-time intraday high of 2,134.72 set on May 20. Tuesday's close was below the key weekly moving average of 2,105.9, but the weekly momentum reading is projected to be 86.14, which is above the overbought threshold of 80.00. Thus significant additional weakness is required over the next three days to have a negative weekly chart.

The Nasdaq Composite Index closed at 5,032.75 on Tuesday, up 6.3% year to date and 1.7% below its multiyear intraday high of 5,119.83 set on April 27. Tuesday's close was above the key weekly moving average of 5,005. The weekly momentum reading is projected to be 76.90, up from 76.07 on May 22. If the Nasdaq ends the month on Friday below 5,005, the momentum reading will likely be declining, shifting the Nasdaq's weekly chart to negative.

The Dow Transportation Average closed at 8,350.50 on Tuesday, down 8.6% year to date and 10% below its all-time intraday high of 9,310.33 set on Nov. 28. That puts transports into correction territory. The weekly chart is negative with the key weekly moving average at 8,714 and the momentum reading projected to decline to 22.34 from 28.90 on May 22. See the daily and weekly charts below.

The Russell 2000 closed at 1,238.76 on Tuesday, up 2.8% year to date and 3.1% below its all-time intraday high of 1,278.63 set on April 15. Tuesday's close was below the key weekly moving average of 1,244.08. The weekly momentum reading is projected to be 58.02, down from 60.24 on May 22. If the Russell 2000 ends the month on Friday below 1,244.08, the weekly chart would be negative.

Here's the daily chart for Dow Transports.


Courtesy of MetaStock Xenith

The daily chart shows the decline from the all-time intraday high of 9,310.33, which was set on Nov. 28. Transports had been trading back and forth around their 200-day simple moving average from March 26 until May 20, and on Tuesday, the 50-day simple moving average of 8,741 declined below the 200-day simple moving average of 8,744 in a formation technicians call a "death cross".

Here's the weekly chart for Dow Transports.


Courtesy of MetaStock Xenith

The weekly chart is negative with the average below its key weekly moving average of 8,714 with declining weekly momentum. The decline from the all-time high to Tuesday's close is 10%, defining a full-fledged correction for this key equity average.

Investors not familiar with technical analysis should begin with the notion that a price chart for a stock shows a road map of past price performance, which provides guidance for predicting future share-price direction.

Here's how to read a daily chart. There are two moving averages to follow; the 50-day simple moving average is in blue, while the 200-day simple moving average is in green.

Here's how to read a weekly chart. This chart shows weekly price bars going back to the beginning of 2007 and thus includes the crash of 2008, then the current bull market for stocks that began in March 2009. The red line tracks the ups and downs of the key weekly moving average. The green line is the 200-week simple moving average. The red line that oscillates along the bottom of the chart is the momentum reading on a scale of 00.00 to 100.00. A reading below 20.00 is oversold and a reading above 80.00 is overbought.

A technically positive weekly chart occurs when a stock ends a week above its key weekly moving average with the momentum reading rising above 20.00.

A technically negative weekly chart occurs when a stock ends a week below its key weekly moving average with the momentum reading declining below 80.00.

This article is commentary by an independent contributor.

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