The Dow Jones Transportation Average is flashing bearish signals for the first time in several months, breaking down from a month-long head and shoulders pattern stretched across the psychological 10,000 level. Slumping airlines and shippers have led the downside in this bearish turnaround, closely followed by packaging and delivery giants, while truckers and railroads have displayed mild relative strength. The group has been fully engaged in a weekly stochastics sell cycle since October, adding weight to the current decline.

The venerable index has a long-held reputation as a canary in the market's coalmine, reacting to subtle shifts in economic strength and weakness that often foretell major turning points. Uninformed market players routinely ignore these early warning signs, believing that the few components under this heading have little power to dictate the market's intermediate fate. However, a reliable track record throughout this bull market cycle tells us that it's time to tighten up stops and take partial profits, even in the red-hot tech sector. (See also: Tips for Trading the Dow Jones Transportation Average.)

The iShares DJ Transportation Average ETF (IYT) closely tracks the underlying index, with the $180 level corresponding with 10,000. The ETF cleared 2008 resistance at $100 in January 2013 and entered a powerful trend advance that continued into the November 2014 top at $167.80. An orderly pullback gathered momentum in August 2015, generating volatile selling waves that dropped the fund to a two-year low at $114.91 in January 2016. It then turned sharply higher, carving two broad buying waves that reached multi-year resistance following the November election.

The fund pushed against the 2015 high and stalled above $170 a few sessions later, easing into a consolidation pattern that generated a September 2017 breakout. The subsequent uptick hit an all-time high at $181.57 in October and got sold aggressively, completing a head and shoulders breakdown that undercut the 2017 high earlier this week. In turn, this signals a short-term failed breakout that could have longer-term bearish implications.

Price action since December 2016 has carved a rising channel that limits technical damage, setting up a key test at channel support and the 2015 high centered between $165 and $167. Not surprisingly, the 200-day exponential moving average (EMA) is lifting into this critical price zone, with the narrow alignment between technical elements marking a line in the sand that transport bulls need to hold at all costs because a breakdown will confirm a long-term failed break while setting off more ominous sell signals. (For more, see: Top 3 Transportation ETFs for 2017.)

United Continental Holdings, Inc. (UAL) illustrates growing danger in the underperforming airline sub-sector, completing a round trip into the January 2015 high at $74.52 in December 2016 and breaking out in May 2017. The rally stalled just above $83 in June while the subsequent decline gathered momentum, triggering a failed breakout one month later. That bearish action also broke the 200-day EMA while an October bounce into that level attracted aggressive sellers.

Ironically, this beaten-down stock is better positioned than the majority of transport components to lead a recovery wave because the decline has reached the 50% retracement​ of the 2016 into 2017 uptrend while the monthly stochastics oscillator has dropped to the deepest oversold technical reading since 2008. However, the vertical decline following the reversal at 200-day EMA resistance will be tough to overcome, with the 50-day EMA in the low $60s likely to attract fresh selling pressure. (See also: United Continental Q3 Earnings and Revenues Top Estimates.)

The Bottom Line

Sell signals are ringing throughout the transportation sector, but tops take time to form, and deeper support levels could eventually hold and generate sizable recovery rallies. Even so, early warning signals often foretell larger-scale market movements, telling risk-conscious traders and market timers to take defensive measures to protect hard-earned profits. This advice follows the more colorful market adage that "bulls and bears make money while pigs get slaughtered." (For additional reading, see: How to Analyze the Transportation Industry.)

<Disclosure: The author held no positions the in aforementioned securities at the time of publication.>