Transports’ Season to Shine: 6 Picks

03/24/2011 3:00 pm EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

History shows that the Dow Transports consistently outperform in the March-to-May time frame. Here we explore six attractive long set-ups, each with manageable risk and promising upside potential.  

The Dow Jones Transportation Average has been one of the strongest market averages since the 2009 lows, up 138% versus just 94% for the S&P 500. The plunge in the Transports on February 22 had me concerned, as the relative performance analysis (RS) had been deteriorating since the latter part of January (see “Dow Transports Lagging”). By early March, with the Transports 5% below the highs, the RS analysis started to improve.  On the sharp decline last week, the Transports held up better than the other major averages, suggesting it is time again to look at the Transports.

Figure 1


Click to Enlarge

When I came across an article in the Financial Post, I recalled that other experts in seasonal patterns had also mentioned this seasonal strength in past years. It also dovetailed nicely with my technical work on the Dow Jones Transportation Average and several of the transport-related stocks.

Strategy: Since the period of seasonal strength typically lasts through May and sometimes early June, a more nimble strategy is advised. In some cases, a more aggressive buying strategy and tighter stops will be recommended, and I will give targets where half the position should be sold. Sometimes these levels will be below the recent highs. If the sell zones are hit, then I would recommend moving the stops at least to breakeven on the remaining position so as to lock in a profit.

Figure 2


Click to Enlarge

The weekly chart of the Dow Jones Transportation Average shows the broad trading range of the past few months between resistance at 5300 and support at 4900. On a break below the 4900 level, the 38.2% support from last summer's lows comes in at 4722 with weekly uptrend (line a) at 4613 this week.

An 8% rally from the March lows would take the Transports back to February highs in the 5300 area. The 127.2% retracement target calculated from the February highs to the March lows is at 5440. The weekly on-balance volume (OBV) has continued to act stronger than prices and recently made further new highs (line b).

The chart of the iShares Dow Jones Transportation ETF (IYT) shows the broad trading range with trend line support at $88.50 just below last week's lows at $88.90. There is additional chart support and the 38.2% retracement level at $87.19. The daily OBV has already moved above the February highs and has short-term support at line d. A break below this support would be the indication that we were going to see a deeper correction. On the other hand, a strong close above $93.92 would be very positive and set the stage for a test of the previous highs at $96.30. The 127.2% target for IYT is at $98.40.

How to Profit: I think that the individual transportation stocks are likely to perform much better over the next two months than an ETF. For IYT, I would buy at $91.34 with a stop at $88.52 (risk of approx. 3.1%). Sell half the position at $95.14 and raise the stop on the remaining position to breakeven.

NEXT: See Which Transport Stocks Will Deliver This Season

|pagebreak|

Figure 3


Click to Enlarge

Having lived for many years in Hawaii, Alexander & Baldwin Inc. (ALEX) is a stock I have long followed. Though ALEX does provide transportation services, the company also has interests in agribusiness and real estate. The weekly chart shows that the correction from the highs made earlier in the year at $44.34 has brought ALEX back to good support at the weekly uptrend ( line b) and the 2010 highs, line a. The 38.2% retracement support is at $38.50 with the 50% support at $36.65. There is minor resistance now at $42.35 and a close above $43.31 would complete the corrective pattern. The 127.2% retracement target is just below $46. The OBV did confirm the new highs this year, as it has moved well above the strong resistance at line c. The OBV is now trying to turn up from its rising weighted moving average (WMA), which is a very bullish sign.

How to Profit: ALEX has one of the more attractive set-ups, and I would buy at $41.14 with a stop at $38.83 (risk of approx. 5.6%). On a move above $43.10, raise the stop to $39.78. Sell half the position at $45.44 and raise the stop on the remaining position to breakeven.

Figure 4


Click to Enlarge

One of the airline stocks I like is Southwest Airlines (LUV). Though there are always concerns about the airlines when energy prices are rising, for now it seems as though they are able to pass the additional costs on to the consumer. LUV has been in a broad trading range for the past 18 months even though it made a marginal new high late in 2010. The longer-term uptrend from the 2009 lows, line b, was broken in late 2010 and a move back above it (currently at $12.80) is needed to reassert the uptrend.

The weekly chart has short-term support in the $11.50 area. The major 38.2% support level is at $10.79, while it would take a weekly close below $10.42 to indicate that a double top had been completed. One of the reasons why I don’t feel a double top is being formed is the action of the OBV. The weekly OBV has led prices higher, making new highs in January even though prices were substantially lower.

How to Profit: I would go long LUV at $12.26 or better with a stop at $11.48 (risk of approx. 6.4%). Sell half the position at $13.36 and raise the stop on the remaining position to breakeven.

Figure 5


Click to Enlarge

Shipping is one of the transportation industry groups that shows the best relative strength even though some of the big-name shippers do not yet appear to have bottomed. Navios Maritime Holdings Inc. (NM) is a Greece-based shipping company that concentrates on dry bulk shipping of commodities such as grains, fertilizer, and iron ore.

The daily chart shows than NM is still locked in a long-term trading range with resistance at $6.30 (line a) and major support at $4.76, line d. There is shorter-term resistance now at $5.80, line b, with the recent swing low at $5.25. The daily OBV has already broken out of its long-term trading range as it moved through line e in the latter part of February while the overall market was declining. The OBV has recently retested the breakout level and turned higher. The width of the trading range (lines a and d) has targets in the $8.00 area. NM had a high in 2007 of $19.70, so the 38.2% retracement resistance stands at $8.20 and the 50% is at $10.43.

How to Profit: NM closed strong on Wednesday, March 23 before this article was posted. Though it is still possible that we will get a setback to the support in the $5.25 area, we might not. I would go 50% long at $5.48 and add another 50% at $5.28 or better with a stop at $4.97 (risk of approx. 7.6%). Sell half the position at $6.19 and raise the stop on the remaining position to $5.34.

Article Continues on Page 3

|pagebreak|

Figure 6


Click to Enlarge

As for the railroads, CSX Corp (CSX) has accelerated to the upside while Norfolk Southern (NSC) shows a much more gradual uptrend with initial support on the weekly chart now at $61.50. The longer-term uptrend (line b) is much lower as it is currently at $57.70. The all-time high for NSC was made in August 2008 at $75.53, which is now the next likely upside target. There is some minor chart resistance in the $72 area. The weekly OBV has already moved above the 2008 highs and shows a pattern of higher highs over the last year, line c. The OBV support (line d) was tested in early 2011 before it again turned higher.

How to Profit: Since NSC is making new rally highs this week, I don't want to chase it and am monitoring Union Pacific (UNP) and Kansas Southern (KSU) for signs that they have bottomed as well. I would look to buy NSC at $64.44 or better with a stop at $59.77 (risk of approx. 7.2%). Sell half the position at $69.88 and raise the stop on the remaining position to breakeven.

Figure 7


Click to Enlarge

Knight Transportation, Inc (KNX) is a $1.6 billion trucking company headquartered in Phoenix whose primary business is carrying commodities throughout the United States. KNX tested all-time highs at $22 twice during 2010 before setting back rather sharply to the $17.70 area, which corresponds to the weekly uptrend, line c. The pullback held above the major 50% support at $17.23. There is short-term support now in the $18.50-$18.80 area. The weekly OBV started a strong uptrend in 2009 and overcame resistance (line d) in early 2010. The OBV held the long-term support at line e in late 2010 and has recently been in a narrow range. It could break out of its range ahead of prices.

How to Profit: KNX dropped down to test the support at $19.10 on Wednesday, March 23 before closing at $19.43 on increasing volume. I would buy a 50% position in KNX at $19.24 and an additional 50% at $19.06 with a stop at $17.96 (risk of approx. 6.2%). Sell half the position at $21.66 and raise the stop on the remaining position to breakeven.

The market has so far held up better than I expected after plunging just a week ago. A strong close at the end of this week will suggest that the worst of the selling is over. I will look for confirmation from the market internals like the Advance/Decline (A/D) line. For the overall market, even in the third year of a Presidential term, the pattern is for stocks to weaken on a seasonal basis after May, so the next rally will need to be watched very closely.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own. Readers can post questions or feedback in the comments area below or send to TomAspray@MoneyShow.com

Related Articles on STRATEGIES