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Bear market bullies have been in control of the transportation market since July 2007, but the tide is about to change.
The rally from March 2003 appears to be a third wave rally of an Elliott Wave advance. The correction from July 2007 has been a fourth wave correction which has 5 clear waves and a decline to about 4130, would complete the fifth declining wave. If 4130 is reached, then the six-month decline would result in a 38.2 per cent Fibonacci correction of the entire advance from March 2003 to July 2007. The same level also marks the 200-week moving average. Additionally, theory suggests that the previous fourth wave of lesser degree usually limits a decline, thus both the weekly moving average and previous fourth wave at 4130 reinforce a support zone and should stem any further declines. Added to this, the upper Bollinger band appears to have turned upward also suggesting a conclusion to the down draft is nearing. Noted however at time of writing that the January 8 trading session marked an intra-day decline to 4194, which may be sufficient to satisfy the downside criteria discussed above.
However, is it the end of the advance or just a pause? If it is the end of the advance then subsequent rallies should lead to further declines and further erosion below 4130. However, I believe that we are about to enter a fifth of a third advancing wave as the third wave is never the shortest and since wave 1(not shown) lasted for about 12 years it seems improbable that wave three would complete in four years time. The transport index is tremendously oversold on a weekly basis according to the MACD and the daily MACD is issuing a positive divergence suggesting a trend change may be nearing. Additionally, Fibonacci time cycles also indicate a low is at hand.
As such a buying opportunity is presenting itself, with the index likely to rebound to at least 5171 over the next three months.
If the transportation sector is nearing a significant bottom then looking for a stock which closely mirrors the index may offer an opportunity to participate in the index's expected rebound.
Shares of Boeing may fit the bill. Since bottoming in 2003 at $24.85 (U.S.) Boeing Company's share price surged to a high of $107.83 in July 2007. However, like the transportation index, this high flyer's share price has been nose diving. It appears however that the share price may be coming in for a landing soon.
The share price formed a double top from July to September 2007 and its decline to $80.85 now satisfies the pattern's downside target measurement. However, the weekly MACD which is oversold has not given a buy signal as yet and all of the weekly averages are negative. The next most likely support area may be the 38.2 per cent retracement of the four year advance which suggests the share price may continue to decline to $75.50 before putting in a bottom. Further risk is seen down to about $72 which is currently the reading for the 20-week moving average and the monthly oversold lower Bollinger band, however investors may wish to accumulate the stock between $72-$75.50 which appears to be the downside target for the second wave correction. A rally should develop thereafter as the stock begins a third wave advance which is usually the most dynamic one in the Elliott Wave sequence. A rally to $86 will find previous resistance but a weekly close above $93.25 should confirm a positive trend. As such a target of $155 over the next two years would not be reasonable if a third wave advance gets underway.
Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.