Trading the Transports

11/04/2010 1:00 pm EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

One of the market sectors that I monitor closely is the Dow Jones Transports, and this group has been particularly important since the March 2009 lows. Of course, for the first half of the last century, the railroads were the dominant part of this group; later the airlines and trucking companies were also added. Currently, the freight shipment, freight management, and marine transportation companies are also included in the Dow Jones Transports. The action of the Dow Jones Transports over the past few years has been quite interesting.

Figure 1


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This weekly chart of the Dow Transports goes back to 2005, but I would like to look first at the top that formed in 2007-2008. The Transports made a high in July 2007 at 5487 (point a) and then turned lower for the rest of the year, while the Dow Jones Industrials and S&P were making their bull market highs in October of 2007. The Industrials and S&P 500 rallied back to Fibonacci resistance in May 2008 as the Transports made marginal new highs at 5536 (point b).

The on-balance volume (OBV) did an excellent job of alerting traders to the fact that this rally was likely to fail as the volume was not supporting the rally in the Transports. The OBV peaked in June 2007 and then formed a short-term negative divergence at the July highs. By the end of 2007, the OBV was in a well-established downtrend (line 3), and therefore, it formed a major negative divergence in May 2008. This downtrend was in force until August 2009 when it was overcome. The OBV rallied impressively from the March 2009 lows and was above its then-rising weighted moving average (WMA) by May. The OBV has continued to lead prices higher as it made new highs in September, but the Transports just recently moved above the April highs. The next Fibonacci targets for the Transports are at 5050.

Figure 2


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The Railroads have already surpassed the highs made in 2008 and have been in a strong uptrend since 2009 (line 1). The weekly chart shows that a continuation pattern (lines a and b) was formed from April through August. The targets from this formation are in the 700 area, which is about 3% above current levels. I use a relative performance (or RS) that is determined by calculating a ratio of the sector price to the S&P 500. When the RS line is rising, it means that the sector or group is performing better than the S&P 500. Conversely, if it is declining, it is underperforming. The RS for the Railroads turned positive at the end of May 2009, indicating that the Railroads were outperforming the S&P 500. Since then, the Railroads have risen 82.4% versus just 28.7% for the S&P 500. There are no signs that the Railroads are topping out, and typically, it would take eight to 12 weeks for an intermediate top to form.

Figure 3


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Kansas City Southern (KSU), a railroad company, is still well below the 2008 highs but has very positive chart and volume patterns. The weekly continuation pattern (lines a and b) was completed the week of October 16, and the stock has targets in the $50 area, along with the upper parallel trading channel (line 1). The OBV does look strong as it overcame resistance (line c) a month before prices broke out to the upside. A pullback could test the short-term support in the $41.50-$42.50 area and should hold the breakout level. It would take a break below support at $36 to turn the chart negative. The first upside target is at $50-$52 with a further target at $55-$56, which corresponds to the 2008 highs.

NEXT: Airline Stocks That Look Ready for Takeoff

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Figure 4


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The Airlines have been one of the strongest sectors since the August 2010 lows, up 37%, but you would not know it from this long-term weekly chart. Last week’s close was decisively above resistance at 89 (line 3), which goes back to 2008. This now creates a multi-year level of support. The downtrend going back to the 2001 highs is now at 100 (line 1), and there is also strong resistance in the 105 area (line 2). I would expect both of these levels to be overcome, and if the current rally is equal to the November 2009 to April 2010 rally, it should take the Airlines to the 110 area.

Figure 5


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Despite the recession, one airline, Southwest Airlines (LUV), seems to always be at the head of the pack as their business model eventually got their competitors’ attention. The weekly uptrend (line 3) was tested in late August before LUV turned higher and overcame resistance at line 2. The longer-term downtrend is now in the $15.50 area with the 2006 highs just above $18. Currently, LUV is a bit overextended, but there is short-term support at $13 with stronger support at $12.00-$12.50.

Figure 6


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One airline stock that appears to have just completed a major base is Jet Blue Airways (JBLU), which just moved above weekly resistance in the $7.00 area (line 1) in the past two weeks. There is also resistance from 2009 in the $7.40 to $7.74 area. The base formation has upside targets at $11.50, which corresponds nicely to the major 61.8% resistance levels. The 50% retracement resistance stands at $10. The daily chart shows first good support in the $6.80-$7.00 area, and a drop back below $6.30 would be negative.

NEXT: More Transport Stocks for Your Watch List

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Figure 7


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The Trucking group broke through resistance (line 2) over the past few weeks and it is now above the April highs. There is a band of very strong resistance in the 380-395 area, which corresponds to the 2008 highs. There is first good support in the 340-350 area with the weekly uptrend (line 1) now in the 320 area.

Figure 8


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Old Dominion Freight Line (ODFL) is a trucking company that provides not only transportation but also logistics, both in the US and in Central and South America. ODFL has been in a massive trading range for the past five years with support at $12.50 and resistance at $27. Last week’s close overcame this resistance and the trading range gives a long-term target in the $50 area. There is a very strong band of support in the $24.50-$25.50 area with the weekly uptrend now below $22. A pullback to the breakout level should provide a good entry point.

Figure 9


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One more transportation stock to look at is Hub Group (HUBG), which is a freight transportation management company that uses both trucking and rail services to move its customer’s freight. The daily chart shows a bullish zig-zag pattern from the August lows and the stock has just broken its short-term downtrend at line 3. Volume was very strong on the recent rally, suggesting that it may be able to break out above the stronger resistance in the $34.40 area (line 1). If HUBG does break out to the upside, it could run to the $40 level. Support on the daily chart is in the $30.50-$31 area.

Though the stock market could easily see a 5% correction before Thanksgiving, the outlook for stocks going into 2011 is still positive and the Advance/Decline (A/D) line continues to lead prices higher. I would expect to get a clear technical warning before an intermediate-term top is formed. I would expect that the Transportation sector will continue to lead the market higher, so the stocks I discussed in this article could be a great way to participate in a higher stock market.

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