Shares of United Parcel Service (UPS) have rewarded owners with a big rally so far this year, but despite a number of fundamental positives, the rally is slowing and traders should be on alert for the possibility of a downward correction.
In this short-term chart of UPS, above, we can see how UPS has rallied above the 50-day and the 200-day moving averages -- which is positive, but I need to point out two bearish divergences on the chart. The first bearish divergence is between the higher price highs since mid-January and the weaker momentum reading on the second push up from the latter half of February into March. Prices made higher highs, but prices traveled a shorter distance on the second advance. The shorter second rally tells the chart reader that prices are running into more aggressive sellers. The second divergence is again the higher price highs versus the equal highs on the On-Balance-Volume (OBV) line. Volume should expand in the direction of the trend, according to Charles Henry Dow. Volume was just as strong on the second push up, when we would have liked to actually see it stronger.
This longer-term chart of UPS, above, gives us some other points to work with. UPS stayed in a $95 to $115 trading range for more than two years. In January, we broke below that range and then we rallied back to retest the 40-week moving average. Prices have become "overbought," looking at the slow stochastic indicator on a weekly time frame. Prices could go higher and become more overbought, but this indicator at least suggests we want go slow with new purchases when prices are extended on the upside.