Get Onboard the Transports Surge
03/16/2012 12:00 pm EST
High-volume gains in transport stocks and the leading sector ETF suggests the group may start rolling higher again soon, and there are at least three good ways to play a potential rally.
In early February, the relative performance analysis on iShares Dow Jones Transportation ETF (IYT) violated support, suggesting a correction was underway. The uptrend in IYT was broken on February 10, which was consistent with a further decline.
It was expected that the deterioration in the transports was warning of an eventual correction in the overall market, which is often the case. For example, the weakening technical picture last July warned of the decline in the overall market that took place last August. Of course, the broader averages did not correct this time, and it now looks like the transports are ready to again join the party on the upside.
The strong volume action in the past few days is consistent with the resumption of the uptrend, and the money flow is impressive. Though the potential for higher crude oil prices over the next few months is likely to cut into the profit margins of transport stocks, the technical action suggests that the strengthening economy will still push them higher.
Chart Analysis: A strong weekly close in the iShares Dow Jones Transportation ETF (IYT) will be consistent with the resumption of the uptrend.
- Next resistance is at $98-$99 with long-term resistance in the $102.50 area, line a
- A move above the $102.50 level would have very bullish implications
- The RS line held above its recent lows on the latest drop and has good support now at line b. The daily RS line (not shown) has moved back above its weighted moving average (WMA)
- Weekly OBV is very close to moving above the resistance at line c, which would signal a resumption of the uptrend
- Good OBV support stands at line d
- There is initial support for IYT at $93.75-$94.50 with stronger support at $92.50
Expeditors International Washington (EXPD) is a $9.4 billion company that provides a wide range of logistics services for the air delivery and freight industry. The company has no long-term debt and holds $1.29 billion in cash.
- EXPD peaked in December 2010 at $57.15 and reached a low point of $38.25 last October
- The stock has been trading in a narrow, $2.50 range for the past eight weeks
- The weekly RS line is still declining and shows no signs yet of bottoming
- Daily RS analysis (not shown) looks better
- Weekly on-balance volume (OBV) looks very positive and has moved well above the 2011 highs as well as the resistance at line h. This is consistent with strong accumulation
- Next resistance is at $46 and then at $48, which is the major 38.2% Fibonacci retracement resistance level
Union Pacific (UNP) was one of the strongest railroad stocks during the rally from the October lows, moving from $77.73 to a high in January at $117.43.
- The rally exceeded the 127.2% Fibonacci retracement target at $116.20, which I highlighted here in January
- The decline from the highs violated the support at $107.90, as UNP made a low of $104.77
- Weekly Starc+ band is now at $123, which also corresponds to the upper boundary of the weekly trading channel
- The RS line confirmed the January highs before dropping back below its weighted moving average
- It has turned up once more and has held well above its long-term uptrend
- Weekly OBV is likely to close the week back above its weighted moving average, which is consistent with the end of the correction
- Initial support now stands at $110.50-$112 with stronger support at $108-$109
What It Means: Thursday’s surge in IYT on six times the average volume is a very positive sign. Given Thursday’s strong gains, the entry level is quite important, as managing the risk with the major averages at these lofty levels is essential.
Therefore, as discussed in “Building a Strong Stock Portfolio,” a two-stage buying process is recommended.
How to Profit: For the iShares Dow Jones Transportation ETF (IYT), go 50% long at $94.58 and 50% long at $93.12 with a stop at $89.56 (risk of approx. 4.6%). Cancel the order if $97.80 is hit first.
For Expeditors International Washington (EXPD), go 50% long at $43.78 and 50% long at $43.22 with a stop at $41.76 (risk of approx. 4%).
For Union Pacific (UNP), our longs established on November 1 at $96.17 were sold at $115.20 and $108.34, and my stop looks to have been too tight on that position. Now, go 50% long UNP at $112.18 and 50% long at $110.88 with a stop at $104.34 (risk of approx. 4%). Cancel this order if $115.80 is hit first.