Active traders, particularly those who are followers of Dow Theory, tend to have an affinity for analyzing the charts within the transportation sector. Since the businesses within the sector operate in segments such as airlines, railroads and trucking, the transportation group is often a relatively accurate fundamental gauge of the overall state of a nation's economy. In this article, we take a look at several key charts within the transportation sector and try to determine how traders will position themselves over the weeks and months ahead. (For a quick refresher, check out: Dow Theory Tutorial.)
The iShares Transportation Average ETF is one of the most popular funds used by active traders for gaining exposure to the transportation sector. In case you aren't familiar, the fund comprises 20 companies from across the United States and has total net assets of over $790 million. Taking a look at the chart, you'll notice that it is trading within an established uptrend, and the ascending trendline has provided support on each attempted pullback since mid-2017. The long-term support of the 200-day moving average has also consistently acted as a guide for technical traders looking for where to place their buy and stop orders.
Given this pattern, traders would expect the significant bounce off of the support to continue in the future, and the recent price action suggests that this will likely be the case. Traders will also look to the bullish crossover between the moving average convergence divergence (MACD) and its signal line as confirmation of the upward momentum. In terms of risk management, stop-loss orders will likely be placed below $180 in case of a sudden shift in fundamentals.
With a weighting of 14.75%, FedEx is the largest holding within the IYT ETF. Shippers such as FedEx continue to expect volumes and pricing to increase throughout 2018, which will likely continue to send the stock prices of the company and others in the sector higher. These strong fundamentals and a chart pattern that looks nearly identical to IYT shown above suggest that FedEx is poised for a move higher. More specifically, the recent bounce off of the combined support near $231 and the bullish crossover of the MACD and its signal line both point to a continued move higher.
While segments such as trucking have been leading the way higher, railroads are close behind. Taking a look at the chart of Union Pacific, you can see that it is trading within a symmetrical triangle pattern. Active traders use this continuation pattern to signal a major move higher once the price breaks beyond one of the well-identified barriers. As you can see below, the price is currently trading close to the resistance level, and many traders are anticipating a breakout because of the recent bullish crossover between the MACD and its signal line. A close above the trendline could likely act as a catalyst to a surge in momentum, and most traders will likely set stop-loss orders below the trendline or the 50-day moving average, depending on risk tolerance. (For more, see: Top 3 Transportation ETFs for 2018.)
The Bottom Line
Transportation is often used as a barometer as to the overall health of the economy. Based on the bullish chart patterns shown above, it appears as though active traders are betting that the U.S. will continue to prosper and that many are positioning themselves for a coming move higher in the transportation sector based on the clear technical buy signs. (For more, see: How to Analyze the Transportation Industry.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a postilion in any of the assets mentioned.