The Dow Jones Transportation Average (DJTA) underperformed badly through July and August, dropping to a three-month low, but it now looks poised to break out and hit a new bull market high. The turnaround eliminates a major obstacle for other blue chip market groups because price action in planes, trains and automobiles traditionally acts as a canary in the coalmine, often signaling economic turns well ahead of supporting data.
A surge in railroad, trucking and packaging stocks has fueled the latest advance, while commercial airline carriers continue to struggle, with the Amex Airline Index (XAL) trading near a 2017 low. This laggard sub-group will need to attract significant buying interest in coming weeks to assist a breakout through stubborn DJTA resistance above 9,700. The current rally could end in a hurry if that does not happen, trapping hopeful buyers in another steep downturn. (See also: 3 Charts That Suggest Transportation Stocks Are Headed Higher.)
The Dow Jones Transportation Average cleared the 2008 high at 5,536 in 2013, entering a powerful trend advance that continued into the 2014 high at 9,310. It then sold off in a deep correction that continued into the February 2016 two-year low at 6,403. The index bounced into the 2014 high after the presidential election and stalled out, generating more than nine months of sideways action across the old high.
A rally above 9,750 would finally confirm the multi-year breakout, raising the odds for an uptrend well above 10,000. However, round number resistance could exert an additional headwind, lowering the price's rate of change until sufficient buying power clears that barrier. That could be why the July uptick ended less than 130 points above the March high, telling informed market players to draw a trendline across those peaks, looking for another reversal around 9,825. (For more, see: Tips for Trading the Dow Jones Transportation Average.)
Norfolk Southern Corporation (NSC) shares topped out at $117 in November 2014 following a multi-year uptrend and sold off in a brutal correction that found support at a two-year low in the mid-$60s in the first quarter of 2016. The stock bounced back to resistance in the fourth quarter and broke out in January 2017, stalling eight points above the prior high one month later. It then eased into a rectangle pattern that crisscrossed new support for more than six months.
The stock rallied to an all-time high above $130 this week, confirming the January breakout while setting the stage for a trend advance that could reach $150. On-balance volume (OBV) has also lifted to a new high, offering a stiff tailwind that should build even stronger sponsorship in coming months. Even so, a NAFTA repeal could put a dent in the developing uptrend, so shareholders should keep one eye on the political headlines. (See also: Norfolk Southern Beats on Q2 Earnings, Revenues Miss.)
Landstar System, Inc. (LSTR) now holds the third slot in DJTA relative strength, highlighting strong price action in the trucking sub-sector. The stock finally cleared the 2008 high at $59.21 in April 2014, entering a strong uptrend that topped out at $81.80 in December. The stock turned lower into 2015, grinding out a broad correction that ended in the low $50s in January 2016, while the subsequent bounce completed a breakout in November.
The rally stalled at $90.80 in December, yielding to a rectangular trading range with support on top of the 2014 high. An August 2017 breakdown to an eight-month low generated a swift selling climax, ahead of a strong rally impulse that posted an all-time high at the start of September. The stock continues to post higher highs as we near the fourth quarter, but it faces stiff round number resistance at $100. (For more, see: Trucker Stocks Shake Off J.B. Hunt Shortfall.)
The Bottom Line
The Dow Jones Transportation Average has sprung back to life after a mid-summer swoon, with many components posting all-time highs. The index is now testing key resistance and will need the underperforming airline sub-sector to attract committed buyers to support a breakout and rally above 10,000. (For additional reading, check out: 3 Transport Stocks That Are Ready to Fly Higher.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>