Stay on the Transport Train!

12/23/2010 9:57 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

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Chart Analysis: In the early 1900s, the Dow Transports, now known as the Dow Jones Transportation Average, was naturally composed of the railroad stocks, but now is composed of air freight, trucking, and other transportation-related companies. I monitor this average closely, as it has led the market higher since the March 2009 lows, up 139% versus just 88% for the S&P 500. The Transports have reached our next upside targets at 5050 and the next targets are at 5250. Volume analysis is still positive. Trinity Industries (TRN) is a mid-cap railroad company, and as mentioned previously, this is a strong time for the mid- and small-cap stocks. The chart shows that a four-month trading range has been resolved, suggesting the overall uptrend is resuming. Upside targets from this formation are in the $27.50-$28.00 area.

What It Means: It is important for stock investors and traders to concentrate on the strongest sectors, as this increases the odds in their favor. Even though the Dow Transports are overdue for a pullback, possibly to the 4850-4950 area, I expect them to still be a leading sector in 2011.

How to Profit: Successful investors and traders know that risk management is critical to your success. That is why in this column, I give very specific recommendations. Some of you may have wondered about yesterday’s comments on KBE. I had a strong feeling that KBE would be higher on the day and only wanted to go long on a slight setback from the prior day’s close. Instead, KBE gapped higher, closed strong, and then was featured on CNBC’s "Fast Money" at the end of the day. Not an ETF that I wanted to chase. For TRN, with a minimum upside target at $27.50, I would only go long at $24.88 or better with a stop at $23.73. Given my target zone, this trade has a reasonable risk/reward ratio.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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