The Dow Jones Transportation Average fell nearly 14% in 2018, giving up all of the gains posted since the last trading day of 2014. The index has bounced about 5% so far in 2019, but the broken uptrend looks ripe for short selling, raising the odds for even lower prices in the coming months. Truckers, packaging companies and airlines have weighed equally on selling pressure, indicating that broad-based themes are moving these stocks rather than local business conditions.

Railroads could open the next chapter in this bearish tale when CSX Corporation (CSX) reports fourth quarter earnings in Wednesday's post-market, followed by Kansas City Southern (KSU) on Friday morning. This sub-group looks more resilient than transport peers, but that's attributable to industry leader Union Pacific Corporation (UNP) trading just 12 points below September 2018's all-time high. Even so, it isn't wise to expect any of the railroads to enter new uptrends as long as trade wars and rising interest rates dominate the financial headlines.

Technical chart showing the share price performance of the iShares DJ Transportation Average Index Fund (IYT)
TradingView.com

The iShares DJ Transportation Average Index Fund (IYT) broke out above 2014 resistance in the $160s at the end of 2016 and dropped into a sideways pattern, spending the next 11 months testing new support. It took off in a vertical advance in November 2017, stalling just above $200 in January 2018 when the Trump administration threatened tariffs on all sorts of foreign goods that travel through the worldwide transportation network.

The subsequent decline found support in the $180s a few weeks later, giving way to a choppy uptick that reached resistance at the January high in August. It rallied to a new high in September but reversed quickly, trapping complacent shareholders in a failed breakout. The subsequent downturn broke February support in December, dumping the fund to a two-year low in the $150s before January's bounce.

The 2019 uptick is now approaching heavy resistance at the breakdown level, raising the odds that aggressive short sellers could reload positions ahead of renewed selling pressure that could reach and potentially violate the December low. The stakes are high because a breakdown will bring a 10-year trendline (blue lines) into play, marking a historic buying opportunity or the end of the sector's long-term bull market.

Technical chart showing the share price performance of CSX Corporation (CSX)
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CSX Corporation (CSX) is expected to report earnings per share of 99 cents on fourth quarter revenue of $3.12 billion in Wednesday's confessional after beating estimates by a wide margin and raising fiscal-year guidance in October. That bullish news triggered a minor uptick, followed by a vertical decline that carried nearly 10 points in less than two weeks. The stock broke that deep low into year end, dropping to a seven-month low.

The January bounce has reached within one point of resistance at the narrowly aligned 50- and 200-day exponential moving averages (EMAs), which are situated just above the October low. Given this bearish alignment, short sellers will be rounding the wagons ahead of the earnings release, looking for bearish catalysts that support new entries. Even a quick rally could be deadly in this price structure, with multiple overhead barriers impeding progress.

The sell-off into December failed to fill the April 2018 gap between $57 and $58.50, marking a natural downside target if sellers take control after the news. The .382 retracement level of the 2016 to 2018 uptrend near $55 looks like a more favorable price to buy the dip, with narrowly aligned support at the top of the 2017 trading range. In either scenario, remaining bulls may have to contend with a brutal monthly stochastics sell cycle that is nowhere close to the oversold level.

The Bottom Line

The Dow Jones Transportation Average has dropped to a two-year low but will maintain its bull market status as long as the price of the IYT fund holds above a 10-year trendline in the low $150s. Sector components are struggling with similarly bearish patterns, buffeted by the twin headwinds of trade wars and rising interest rates.

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