The transportation sector is often used by many active traders as a gauge for underlying economic conditions. Often regarded as a defensive position, rails, long-haul trucking, package delivery, and other sorts of transport stocks often suffer from similar market trends yet over the long term seem to trend higher. Based on the charts discussed below, it appears as though transports, more specifically railroads, could be well positioned to make a move higher over the weeks or months ahead.

iShares Transportation Average ETF (IYT)

Active traders who look to gain an understanding of where broad markets are headed often turn to exchange-traded products for clues about future direction. As mentioned above, the transportation sector is often used as a barometer for economic strength and appears to be headed higher from here. Following the transport sector is also a favorite among active traders who use it as part of Dow Theory, which is a popular technique used for gauging long-term market trends.

In the case of the iShares Transportation Average ETF (IYT), the formation of an ascending triangle, breakout, and subsequent retest of the 200-day moving average will likely be of specific importance because they are pointing to a move higher from here. The recent move back below the trend could be presenting traders with an ideal entry point given the proximity to the 200-day moving average, which has propped up the price on sell-offs in the past. Traders will also likely look to the bullish crossover between the moving average convergence divergence (MACD) and its signal line as a leading indicator for another move above resistance and then higher. Based on the pattern, target prices will most likely be placed near $250, which is equal to the entry point plus the height of the pattern.

Chart showing the share price performance of the iShares Transportation Average ETF (IYT)
StockCharts.com

Norfolk Southern Corporation (NSC)

The railroad industry is one of the pillars of economic strength. As the top holding of the IYT ETF, with a weighting of 11.73%, Norfolk Southern Corporation (NSC) will likely be looked to by many traders for ideas as to where the broader market could be headed.

As you can see from the chart, the price has recently moved above the resistance of an influential horizontal trendline. Heightened levels of buying interest in late 2019 have triggered a bullish crossover between the 50-day and 200-day moving averages. The popular buy signal seems to have led to a continuation of buying pressure, and the recent retracement toward the dotted support level could be presenting traders with an ideal entry point.

Chart showing the share price performance of Norfolk Southern Corporation (NSC)
StockCharts.com

Union Pacific Corporation (UNP)

Another railroad that is one of the top holdings of the IYT ETF that is of specific interest to active traders is Union Pacific Corporation (UNP). Taking a look at the chart, you can see that the price has recently moved above a key horizontal trendline. Bullish price action over the past several months has also triggered a bullish crossover between the long-term 50-day and 200-day moving averages (marked by the blue circle), which often marks the beginning of the long-term uptrend.

Chart showing the share price performance of Union Pacific Corporation (UNP)
StockCharts.com

The Bottom Line

The transportation sector is often regarded as one of the barometers of the financial markets. Based on the charts discussed above, recent moves beyond key levels of resistance and retracements toward levels of support suggest that this could be the sector to watch over the weeks or months to come. 

At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.