Dow Transports at key level to watch if it becomes resistance on the monthly chart

The Dow Transports today have reached a critical level in the long-term charts, which will be important to watch and see whether or not the transport index can push through resistance. Let's take a look. We've been looking in on the transports from time to time. Early this year, we identified a probable triangle that pointed toward 2600, and it was a reason why we held bearish even during the February swing highs. Then, once the transports reached that 2600 target, one of the signs we pointed out as a positive was that they had retraced to the key .786 Fibonacci level on the monthly chart, measured back to the 2003 lows.

It took some days for the transports to find a low after reaching that level, but then they finally rebounded back above 2600. By that time, we had already pointed out that it would be very important to see what the transports would do at the 3,000 level where the 200-month moving average would likely provide resistance. Well - we are there today!

It's interesting this is happening as the 20-month moving average moves under the 50-month moving average - this kind of snap-back often occurs when a key MA crosses another key MA. It doesn't mean the snap-back continues; that certainly depends on other factors.

There are reasons to think that the Dow Transports can continue to recover. Maybe even reach new highs (crazy as that may seem today). But let's take it one day at a time right now - their first challenge is what happens at this level. Above this, then of course there's the 200-day moving average. When economic activity picks up, it's felt fairly quickly in the transports by the nature of the business. So, even if you're not trading the transports, you should remain aware of how they react at these levels, since they play an important role in our economy and therefore the broader stock markets too.

The monthly chart is above right. The daily chart is below. You can see that on the daily chart, not only is the 3,000 level an obvious price resistance level based on the prior swing lows of November 2008 and late January/early February 2009, but also with the supply overhang depicted by the volume-by-price bars along the left side of the chart. So even if the transports can break through, it would be normal to expect some "turbulence" during the effort. On the other hand, if the transports weaken from this level, then they might experience only a temporary pullback ... but bears will be tempted to see whether a loss of the 200-month moving average will pull this index down to new lows. Another reason for us to continue a close eye on the transport index.