The Dow Jones Transportation Average (DJTA) sold off more than 1,600 points into February and has now settled near psychological support at 10,000, signaling a potential buying opportunity that is likely to favor direct exposure through the iShares Transportation Average ETF (IYT) as well as favorably positioned index components. Intermediate upside may be significant, with good odds for new bull market highs.

Components J.B. Hunt Transport Services, Inc. (JBHT) and C.H. Robinson Worldwide, Inc. (CHRW) sit at the top of the group's relative strength list after the fearsome decline, pointing to resilience that should unpin the next recovery wave. On the flip side, airlines should be avoided after dropping to the bottom of the list, in line with growing fears of a price war. (See also: United's Growth Plan Sends Airline Stocks Into Tailspins.)

 

The iShares D.J. Transportation Average ETF cleared 2008 resistance at $99.09 in 2013 and entered a healthy uptrend that continued into the December 2014 high at $167.80, corresponding with 9,300 on the underlying instrument. The ETF then sold off in a major correction, dropping to a two-year low at $114.91 in January 2016. The subsequent uptick completed a round trip into the prior high in November and broke out into 2017, stalling just above $170. 

The fund spent the next 12 months consolidating near that price level, carving a shallow rising channel that briefly pierced $180 (DJTA 10,000) in October. A November low at $169.45 set the stage for a December channel breakout that gathered momentum into January 2018's all-time high at $206.73 (DJTA 11,424), ahead of a vertical decline that undercut breakout support on Feb. 9.  

The sell-off cut through DJTA 10,000 and reached 200-day exponential moving average (EMA) support that session, predicting that the fund will now enter a basing process that could last several weeks. The weekly stochastics oscillator may offer an actionable buy signal in this scenario when it crosses higher from an oversold reading. It has just reached that extreme level, telling market players to pull up a chair and keep their powder dry while waiting for the cycle to turn. (For more, see: Tips for Trading the Dow Jones Transportation Average.)

 

J.B. Hunt Transport Services shares ended a long-term uptrend at $93.50 in April 2015 and sold off to the mid-$60s in the first quarter of 2016. The stock bounced to the prior high in November and broke out, but the rally failed in January 2017, carving a breakdown that reached the low $80s in March. A bounce off that level reinstated the breakout in August, generating strong price action that has posted a series of all-time highs.  

The stock broke out of a two-month rectangle pattern with resistance at $111 in December, reached $126.49 on Jan. 24 and turned lower into February. It bounced at breakout support last week and is now consolidating in a small-scale triangle near the 50-day EMA. A rally above $118 could attract momentum buying interest, generating a strong recovery that may test or exceed the 2018 high. (For more, see: Top 3 Transportation ETFs for 2018.)

 

C.H. Robinson Worldwide stock topped out in the low $80s in 2011 and fell into a long-term downtrend that hit a five-year low at $50.21 in 2014. The subsequent bounce stalled at the .618 Fibonacci sell-off retracement level in 2015 and finally cleared that barrier in December 2017, entering a strong uptrend that posted a series of all-time highs into January's peak at $100.18.

The sell-off into February posted a six-week low at $87.16 and has settled at the 50-day EMA. A one- to three-week basing pattern near this support level could generate a strong bounce that reinstates the uptrend and continues well into the triple digits. A hidden gap between $92 and $95 could slow or stall progress, so conservative players may wish to remain on the sidelines until bullish action clears that barrier. (See also: C.H. Robinson Q3 Earnings and Revenues Beat Estimates.)

The Bottom Line

The Dow Jones Transportation Average undercut psychological support at 10,000 last week, possibly marking the first stage in a bottoming pattern that sets off a series of sector buying opportunities. (For additional reading, check out: How to Analyze the Transportation Industry.)

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

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.