One of the main tenets of Dow Theory is that major trends are identified when a major average such as the Dow Jones Transportation Average moves beyond its previous swing high/low and is then confirmed by movements in other indexes. As a result, many active traders tend to keep a close eye on the transportation sector and look to it as a leading indicator that can predict the movements of the broader market. In the paragraphs below, we'll take a look at several key charts that traders use to track the transportation sector and try to determine what may lie ahead for the rest of 2018.
As discussed above, the transportation sector is often looked to as a leading indicator that points to how traders expect the broader market to behave. Taking a look at the chart of the iShares Transportation Average ETF, you can see that the price has recently closed below the combined support of the 200-day moving average (red line) and an ascending trendline. The close, as shown by the blue circle, will likely be used by traders to signal a shift in the long-term uptrend, and most bearish traders will likely want to protect their short positions by placing stop-loss orders above $193.90.
When it comes to the transportation sector, there are few names that are more well known than FedEx. More specifically, as the top holding of the IYT fund, FedEx is often looked to by active traders as a barometer for the rest of the sector, and as you can see below, the close below the dotted trendline suggests that the uptrend has reversed and that the bears are now in control of the momentum. Traders will likely maintain a bearish outlook on the stock until clear buy signs start to appear on the chart.
Unsurprisingly, trucking and other long-haul forms of transport are key components of the IYT ETF. Traders looking to gain a sense of how the trucking industry is performing generally turn to components such as J.B. Hunt Transportation Services, the fund's fifth-biggest holding. Taking a look at the chart, you can see that the break below the dotted trendline looks identical to what was shown above. However, in this example, it is interesting to note how the sell-off is about to trigger a bearish crossover between the 50-day and 200-day moving averages. This upcoming long-term sell signal could be enough of a catalyst to trigger a move lower, and the bears will likely look to protect their position by placing stops above $120.66 in case of a sudden shift in fundamentals.
The Bottom Line
For many, the transportation sector represents the backbone of the economy and is often a good indicator for how the rest of the market will perform. As shown in the examples above, the recent closes below long-term levels of support suggest that the bears are in control of the momentum and that prices could be headed lower into 2019.
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.