A text book “Broadening Formation” on the DOW Jones...

A text book “Broadening Formation” on the DOW Jones Transportation Index (DJT) …

https://www.investopedia.com/terms/b/broadeningformation.asp … a few excerpt quotes below, then some commentary.




[[[[[ A broadening formation is a price chart pattern … is characterised by increasing price volatility and diagrammed as two diverging trend lines, one rising and one falling. It usually occurs after a significant rise, or fall, in the action of security prices. It is identified on a chart by a series of higher pivot highs and lower pivot lows.

…. This creates a series of higher interim peaks in price and lower interim lows. When connecting these highs and lows, the trend lines form a widening pattern that looks like a megaphone or reverse symmetrical triangle.

… the formations are more common at times when market participants have begun to process a series of unsettling news topics. Topics such as geopolitical conflict or a change of direction in Fed policy, or especially a combination of the two, are likely to coincide with such formations. ]]]]]

In DOW theory, the DJT is the markets leader … if trucks are trucking, ships are shipping, and planes are flying, it means economies are moving and times are buoyant … the opposite means poor economic growth to recessions. The DJT is therefore in many cases the canary in the gold mine.

Of late, the DJT and DJI (our DJIA) have very noticeably lagged the S&P and Nasdaq … even as VIX, T10 yields are falling … so are the S&P and Nasdaq soon to be dragged back to reality? The norm is that these two cannot be out of sync with DJT/DJI other than in the short term. The lesser likelihood is that DJT/DJI join the S&P/ Nasdaq party late.

The “ Broadening Formation” on the DJI perfectly reflects increasing volatility as markets process “unsettling news topics such as change of direction in Fed Policy and geopolitical conflict (from the last quoted paragraph excerpt above). This formation, with its increasing volatility seems for now to be the likely reason the DJT is providing no clear lead at present.

So maybe a period of days to many weeks until the DJT is less confounded … buckle up for whipsaw sessions on the DJT and similar but more muted sessions on other indexes. From a day trading perspective, the Broadening Formation offer great guidance on entry and exit points.

Dex