Transportation ETF an Aggressive Buy

07/28/2006 12:00 am EST


Gerald Appel

Publisher, Systems & Forecasts

In their recent remarks to their Systems & Forecasts subscribers concerning the volatile market, Gerald and Dr. Marvin Appel commented that “Transportation stocks have been one of the strongest areas of the market this year…


"Moreover, fundamentals for the industry remain favorable. Railroad traffic has continued to increase despite the slowdown in homebuilding (Supplying lumber has been a significant but not overriding source of revenue for railroads.). There are also indications that US exports are increasing as a result of the weak dollar.


“Transportation stocks sold off along with the rest of the market during the start of July. However, the ETF that tracks the Dow Jones Transportation Average (IYT  ASE) looks to be a short-term buy at current levels ($81 or lower). Heavy volume came in to support the July 17 low price of $81.69/share, from which point IYT recovered by more than $2.60 by July 19. However, on July 20 IYT fell more than 4% to close at a new July low of $80.50/share.


“Given the long-term strength in the sector, it appears reasonable to take a short-term trade, with an initial upside objective of the middle band (21-day moving average, now at $85.60).


This is a somewhat aggressive trade in that the medium (12-26 day) MACD is still falling. Potential price support appears to lie in the area of the July 20 close of $80.50, which is between the June 13 low of $79.91 and the July 17 low of $81.60. I recommend an initial trailing sell stop of $2.50 below your purchase price. If the MACD turns up before the sell stop is hit, then an intermediate term bullish double rising bottom will have been formed. In that case, the upside objective should be raised to the area of the upper trading band, now at $88.30.


“This trade is suitable for aggressive investors or for only a small portion of investment capital because of the high level of daily volatility in IYT. The average daily move (up or down) has reached 1.2% which is one and a half times the volatility of the S&P 500.”

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