The Dow Jones Transportation Average (DJTA) kept Dow Theory enthusiasts guessing through most of 2017, stuck at 2014 resistance while failing to track the Dow Jones Industrial Average through a dramatic series of bull market highs. This bearish divergence failed to confirm the growing uptrend according to rules outlined by Charles Dow more than 100 year ago, which require both instruments to post new highs.
The waiting game finally ended in October, when transports awoke from their long slumber, lifting the average above 10,000 for the first time. A pullback into November found aggressive buying interest, generating a powerful breakout that has finally set off bullish Dow Theory signals, predicting that the bull market has a long way to go before topping out. It also bodes well for transports in 2018, raising the odds that the group will assume the leadership mantle because they're less overbought than S&P 500 or Dow Industrial components.
It is natural for all kinds of securities to pause around big round numbers, often for months or years, before proceeding to higher ground or reversing in a major trend change. The DJTA traded at 10,000 for the first time on Oct. 12, and two months might be insufficient to complete the harmonic transition. However, this fast-moving bull market could short-circuit those natural tendencies, allowing the average to post outsized gains, at least in the first half of 2018. (See also: How to Analyze the Transportation Industry.)
The iShares DJ Transportation Average Index Fund ETF (IYT) mounted 2008 resistance at $99 in 2013, entering a strong uptrend that continued into the November 2014 top at $168. It underperformed badly in 2015, dropping in an intermediate correction that posted major losses into January 2016, when the decline bottomed out at a two-year low near $115. The subsequent recovery wave reached the prior high in November and eased into a shallow trading range that crisscrossed the prior high repeatedly into September 2017.
A shallow rising channel took hold after the May 2017 low at $157.65, posting higher August and November lows. The fund broke out above the trendline of rising highs on Nov. 30 and set off strong buying signals, intensified by the underlying index's thrust above psychological resistance at 10,000. It stalled just two days later, entering a consolidation that should break, one way or the other, following this week's FedEx Corporation (FDX) earnings report. (For more, see: Top 3 Transportation ETFs.)
Sector-leading FedEx reports fiscal second quarter earnings on Tuesday evening, generating a reality check for the recent breakout. The stock has reached weekly and monthly overbought technical readings that could trigger a bearish reaction unless the company posts blowout numbers. Price action that deviates from this expectation could reveal unusual demand or the willingness of shareholders to sell now, despite the tax benefits that they would obtain from waiting until January 2018.
The stock mounted the 2007 high at $121.42 in 2013 and took off in a powerful trend advance that stalled in the $180s in 2014. It broke that resistance level following the November 2016 election and stair-stepped higher in June 2017, posting an impressive series of new highs into December. It has now carved a narrow two-week pennant at $240, signaling a holding pattern that sets the stage for this week's confessional.
The $235 level marks natural support that should hold unless the quarterly report offers unpleasant surprises, which seems unlikely. A breakdown through that level would set off an intermediate sell signal, in turn raising the odds for a decline toward $220. Meanwhile, a positive reaction opens the rally door to the low $250s, with that price level likely to inhibit further upside well into 2018. (See also: FedEx Stock Set to Deliver Holiday Cheer to Investors.)
The Bottom Line
The Dow Jones Transportation Average has broken through the top of a rising channel across the psychological 10,000 level, revealing significant strength that should support excellent 2018 upside. This week's FedEx earnings should offer insight about the emerging trend and how much sidelined cash is left to play this leadership sector. (For additional reading, check out: Tips for Trading the Dow Jones Transportation Average.)
<Disclosure: The author held no positions in aforementioned securities at the time of publication.>