Fitz Bits: Revving Their Engines

OK, let's look at the transportation sector. iShares Dow Jones Transportation Average Index Fund (IYT) Dow Jones U.S. Railroad Index Kansas City Southern (KSU) Union Pacific (UNP) Norfolk Southern (NSC) Each day, I'm featuring several reader requests for the current technical take on a stock. I can't assure you that I'll get to yours, but I will certainly make every attempt to do so, as long as the stock meets the following criteria. 1. The average daily trading volume needs to exceed 250,000 shares. If a stock trades too thinly, chart analysis doesn't help much, because there just are not that many traders involved. One big buy or sell order can move the stock in ways that chart analysis just cannot predict. So let's stay above 250,000 daily shares. 2. The stock really needs to be trading above $5. Sub-$5 stocks don't get the same treatment by institutions and portfolio managers. Also, many traders set their trading screens to ignore stocks below $5 just to cut down on their trading candidates. While I'm sure your favorite penny stock is the next undiscovered gem, I'm not in the business of breaking news stories ... so once your gem is discovered, let me know, and I'll take a look at the chart. 3. Make sure you check my recent 3 Stocks I Saw on TV videos. I don't want to be too redundant, so if I've recently covered a stock in video format, I won't repeat it here. Hopefully, you've noticed that I alternate between daily and weekly bars in the charts. It's important to understand the underlying rationale for choosing one time frame over another. I differentiate between these time frames in pretty simple terms. The longer time frame -- the weekly bar chart -- is my decision time frame. I want to remain in phase with the trend, and I use the weekly bar chart to identify the trend. So I'll feature a weekly chart when I want to emphasize a certain aspect of the prevailing trend -- not a specific buy or sell point. This weekly chart is the time frame in which I make my decision: Do I want to buy or sell the stock? The daily chart is my action time frame. Once a decision is made on the basis of the weekly time frame, then we zoom in on the daily chart to choose that level at which action is taken. The daily time frame is my preferred frame of reference for actually implementing the decisions I've made on the weekly chart. In your own analysis, make sure you are using different time frames for different things; otherwise your actions will largely be a function of your emotions. The S&P 500 and Dow 30 have been pretty strong over the past week or so, but the Dow Jones Transportation Index -- seen here through the iShares Dow Jones Transportation Average Index Fund (IYT) -- has been flatlined. That's a cause for concern, because you really want to see all of the major averages moving together. However, the symmetrical triangle just may be setting up for a confirmation breakout. After hinting at a double-top at around $96 back in February and March, a breakout from current levels just could push the transports to new highs. Let's look at some of the railroad stocks that might just be telling us why the transports are starting to perk up. This weekly chart of the Dow Jones U.S. Railroad Index shows solid resistance at 850 that first occurred in mid-2011. After the 2011 decline that took just about everything down with it except inverse ETFs, the railroads have been moving nicely. This most recent test is starting from the 200-day moving average -- a higher level than previous tests. This increases the likelihood that the railroads will break out, because it didn't take much buying activity to push the index up to resistance, so there's more firepower than at prior tests of 850. Let's look at a few stocks. Kansas City Southern is starting the party early, having broken above a flat triangle with a top at $75. Volume is waning just a bit, which you'd expect after a fast move. I'd wait for a pullback closer to $75 before I'd buy. Union Pacific has been trading lower since peaking in early February. But this daily chart shows a breakout above the downtrending resistance channel and a price that's close to eclipsing the March high. Should that move occur, it would mean a higher high. In that event, we'd need to look for a higher low on any pullback. I've circled $110 as a good buy level -- right above the 50-day moving average. But even a pullback into the channel would be OK, so long as Union Pacific doesn't fall below $105. After all, a low that's above $105 is still a higher low, and that makes the stock buyable. Norfolk Southern broke out of a steep downtrend in early April -- and, after consolidating for a few days just below the 200-day moving average, the stock is off to the races again. But Norfolk has run too far, too fast, to warrant a good entry at this level. Instead, just let this move run its course and wait for any kind of pause or pullback -- then buy. A pullback closer to $70 would provide the most favorable entry, because it would be close to that little congestion flag pattern between $68 and $70. Be careful out there. _______ Editor's Links More technical analysis: Take a Long Cruise on Carnival Maxim Surges to New Highs The BoJ Is Out of Bullets

Fitz Bits: Revving Their Engines

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