Norfolk Southern (NSC) continues to add to the transportation woes, just when it looked like FedEx (FDX) and JB Hunt (JBHT) might be able to save the sector from a breakdown. Here's the thing, though: I am not concerned with the short-term action of the transports, as least in regards to the larger indexes, like the S&P 500 (SPY). A longer-term breakdown in transports would be the real concern there.
The weekly and monthly views are my focus in regard to the iShares DJ Transportation Average Index Fund (IYT) rather than the daily view. The picture here isn't quite so grim as the report from NSC may make it feel. Don't get me wrong, there are concerns. A few strong performances are helping to maintain price support here, but some cracking is starting to show. It's been a two-year run-up for IYT. Remember, during those two years just about everything ran higher, but IYT stalled in late 2014.
The question becomes: Is this sideways movement a bullish flag or a top? The answer is: It depends. It depends on the price action that comes next. Do we move over resistance at $165, thus making this current pattern a bull flag? Or do we break below $150 and put this bullish trend in breakdown mode? The relative strength index (RSI) and commodity channel index (CCI) give us a clear read that momentum is dead right now. Price isn't as bearish as the momentum indicators, and that's a concern.
Furthermore, while some may view the slow stochastics hitting the oversold levels in terms of the %K, note the last two times this happened in 2012, we did not get anything in the way of a bounce. It was another three to six months before we saw any significant push higher. The same can be said for the CCI. The only outlier in that regard is the RSI, where these levels have had some success along with some stalling.
If we try to get some idea of where support sits, I have to bring in Fibonacci levels and combine them with the recent fall 2014 lows around $140. This would be a logical target with the $130 area as being an oversold overshoot level. I don't foresee the $130 area being hit. This sets up a few ideas. One could play a longer-term ratio put spread with a long $140 put and two or three short $130 puts to finance the long puts. A trader could also consider a bullish put spread targeting the $135-$140 area on the short side of the put spread and $130 on the long side. The other idea would be to set up an iron condor with short $165 calls and $135-$140 puts while positioning the long side with a strike $10 further out of the money.
Pulling back to 30,000 feet, the monthly chart shows us how strongly correlated the S&P 500 is to the IYT. Save for a very few bumps in the road, the correlation here is nearly perfect. Therefore, a longer-term downturn in the IYT would eventually weigh on the SPY. Notice how the momentum indicators here are still strong, but have fallen out of overbought territory. That is a concern. It doesn't necessarily make the action bearish, but it does change it more to a neutral view from a long-term trading standpoint. Again, the $165-$170 area is very important and IYT looks like an avoid until we see those levels broken on the upside.
The last push higher from 2009 through the highs of 2011 saw a pullback of 50% of the move, so if that repeats, we are looking at $125 being tested in the next year. Even if we only see a 38.2% retracement, we should still expect a correction coming and the mid-$130s to offer the next attractive entry. While this doesn't match up perfectly with the weekly chart, it does provide some solid downside idea of where IYT could head if the $150 level is lost. Also, the two charts together paint a very clear picture IYT doesn't offer an attractive bullish entry until it gains more traction to the upside and trades in the $165-$170 range.
There are better plays out there at the moment, and this may set up as a great hedge against long positions or even a short play should $150 be lost on the downside.
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