Market update : S&P500 9/27/12 ; Dow Jones Transportation Average

the major indices have broken out of important resistance to multi-year highs. And this week, as anticipated, each index has pulled back and is in the process of testing the support immediately above the major breakout point, which for the S&P 500 is at 1,418.

First, note the intermediate support line drawn with an upward trending solid red line. This is a major support line, and it should hold as it has on three occasions.

Above it are trading zones and a flag. The flag is green and is bullish, almost always pointing in the opposite direction of the next important move. It is pointing down, thus we expect that prices will eventually punch through its top at about 1,460.

Within this structure are two other lines, the resistance at 1,450 and the support at 1,438.

We’ve highlighted the Dow Theory divergence several times this month, i.e., the failure of the Dow Jones Transportation Average to confirm the new high in the Dow Jones Industrial Average. This is considered a negative, and until it is resolved by both indices making new highs, or lows, it is interpreted as a cautionary yellow flag to those who follow the theory.

The yellow flag could turn to pale red if the transports break below the close of June 4 at 4,848. But it could also turn green if it closes above its double-top at about 5,360 made earlier this year.

Note that the transport’s MACD is now oversold, which may indicate that after piercing its recent low it could reverse up and the broad advance could resume.