The transportation sector is often closely watched by active traders and particularly those who follow Dow Theory as part of their strategy. In short, Dow Theory confirms broad market uptrends when one of its averages such as the transportation average advances above a previous swing high and is accompanied by a similar advance in other indexes.
Bullish momentum as of late has sent prices of key indexes, specifically transportation, above influential levels of resistance. Based on the chart patterns that you'll read about below, recent price action should not go unnoticed and could be an early indication of continued moves higher over the days and weeks ahead.
iShares Transportation Average ETF (IYT)
Active traders interested in analyzing the transportation sector often turn to exchange-traded products such as the iShares Transportation Average ETF (IYT). For those who are unfamiliar, the IYT ETF comprises 20 holdings spanning U.S. airlines, railroads, and trucking companies.
As you can see below, the price of the fund failed to make strides above the 200-day moving average on a couple different occasions over the past several months. However, the past 10 trading sessions have been dominated by the bulls, and it is clear that the momentum is currently in their favor, with little reason to expect it to reverse any time soon. Followers of technical analysis will want to pay close attention to the 50-day and 200-day moving averages because a bullish crossover will most likely be another catalyst of a move higher because it is a common buy signal that often marks the beginning of a significant long-term uptrend.
Norfolk Southern Corporation (NSC)
As the top holding of the IYT ETF, Norfolk Southern Corporation (NSC) and the rest of the U.S railroad industry will likely capture the attention of traders over the weeks ahead. The reason this chart is of such interest to active traders is that it has moved above a key level of resistance while also being in close proximity to the significant support of the 200-day moving average.
Technical traders will also want to take note of the bullish crossover between the 50-day and 200-day moving average, known as the golden cross, because as we discussed above, it is a common long-term buy sign and is likely signaling the start of a major long-term uptrend. From a risk-management perspective, stop-loss orders will most likely be placed below $179.72 in case of a sudden shift in market sentiment or sector fundamentals.
FedEx Corporation (FDX)
One of the most well-known transport companies, which also happens to be a top holding of the IYT ETF, is FedEx Corporation (FDX). Taking a look at the chart below, you can see that the bears were in control over much of the past year, but the breakout in early July signaled that the trend was reversing and that the bulls were taking control of the momentum.
The strong price action in recent weeks has also triggered a bullish crossover between the long-term moving averages. This will likely be used to confirm the trend reversal, and traders will most likely want to place their orders as close to one of the dotted trendlines as possible in an attempt to maximize the risk/reward.
The Bottom Line
Transportation stocks have come to the attention of active traders in recent weeks because prices from across North America have moved above key levels of resistance and have triggered major long-term buy signals. Nearby support levels provide an added level of comfort for those looking to minimize risk.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.