Identifying defined ranges by using trendlines is one of the most important skills that an active trader learns to master. Trendlines provide traders with clear levels for determining the placement of buy, sell and stop orders, which removes the subjectivity that can often be associated with certain investment strategies. In this article, we take a look at the defined ranges appearing on the charts of transportation-related securities and try to determine how traders will position themselves over the weeks or months ahead. (For further reading, see: Top 3 Transportation ETFs for 2018.)
One of the most common patterns that traders look for is known as the channel, which you can see featured on the chart of the iShares Transportation Average ETF. The horizontal trendlines used to create the pattern have created clear boundaries for the price, and last month's breakout was the catalyst that traders were waiting for to signal the next leg of the trend. The close above the upper trendline is a clear technical buy sign and suggests that the momentum is now in the favor of the bulls. Stop-loss orders will likely be placed below either of the trendlines or the 200-day moving average ($183.98) in order to protect against sudden shift in the fundamentals.
The ascending triangle pattern is a common continuation pattern that appears after a brief period of consolidation within a major trend, as shown on the chart of FedEx. The series of higher lows suggests that the supply and demand profile is shifting in favor of the bulls, while the nearby support of the 200-day moving average will also assist in the conviction of a move higher. Active traders will likely keep a close eye on this stock over the coming weeks because a close above $258 would likely trigger a breakout. Based on the height of the pattern, target prices would likely be placed near $290. (For more information in how to set target prices, check out: How can I determine a stock's next resistance level or target price?)
Trendlines are also often used to identify periods of support or resistance by marking the level of previous peaks and valleys. This method is usually quite effective at determining potential levels of support and resistance. In the case of Norkfolk Southern's chart, which can you can see below, the price has recently bounced off of the long-term support of the 200-day moving average and has trended toward previous swing highs. The dotted trendlnes will undoubtedly be used as guides for placing orders over the coming weeks because a series of consecutive closes above $155.61 could be the catalyst for a major move higher.
The Bottom Line
Recent volatility in the broad markets has made it relatively difficult for trend traders to find profitable opportunities in recent weeks. However, based on the charts of the transportation-related securities discussed above, it appears as though this sector is where traders could choose to focus their attention. (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 position in any of the securities mentioned.