Looking for Tells in the Transports

The Dow Jones Transportation Average (TRAN) has a golden opportunity this week to reclaim broken support near 4400. Failure isn't an option because a selloff that violates last week's low will confirm a bear-market decline that could yield 1,000 downside points in the fourth quarter. This has negative implications for the broad market, which is struggling to hold the August lows. Dow Jones Transportation Average -- Monthly Source: eSignal View Chart » The index posted a double-top (note the red lines) across the 2008 high between May and July, and then sold off, breaking support in August and dropping to an eleven-month low at 4300. It bounced up to 4700 a few weeks later and tested that level two times, turning lower after each rally attempt. The index cut through August support last week, selling off to a 52-week low near 4100. The current bounce has lifted the price above the August pivot, signaling a 2B buy signal that predicts a third attempt to clear the top of the trading range set into place nearly two months ago. This is a sink-or-swim scenario, with any decline below 4096 confirming last week's breakdown and onset of an active downtrend. Of course, the transportation sector comprises a diverse group of subsectors that frequently trade in conflict with each other. For example, the railroads shined for many years, hitting new highs while the airlines languished at multiyear lows. But taken in its entirety, this group can flash unmistakable bull or bear signals about the health of the U.S. economy. Recently, those portents have warned about a double-dip recession, with declining activity across many subsectors. The packaging companies are especially important in this regard because business at FedEx (FDX) and United Parcel Service (UPS) exhibits strong and straightforward alignment with economic cycles. FedEx (FDX) -- Monthly Source: eSignal View Chart » After lowering guidance in its earnings report last week, FedEx looks downright terrible right now. The subsequent selloff broke the August and 2010 lows, dropping this canary-in-a-coalmine to a two-year low. That's the exact opposite of what you want to see if you believe the U.S. economy has bottomed and is ready to turn higher. Unlike the transportation average, this stock is still busted and broken after failing to issue a buy signal with the broad market. To accomplish that task, it needs to fill the gap between $70 and $72.50 and then hold above the top of the fill level. That scenario seems unlikely with On Balance Volume (OBV) falling to a yearly low and long-term relative strength turned lower. Railroads are struggling as well, after reports of shrinking coal demand triggered a major selloff last week. The furious decline dumped major players Norfolk Southern (NSC), United Pacific (UNP) and CSX Systems (CSX) to new 2011 lows. While these stocks have bounced in the last few sessions, none has issued a fresh buy signal. Kansas City Southern (KSU) -- Monthly Source: eSignal View Chart » Kansas City Southern (KSU) is the brightest light in the beaten-down group. The stock has managed to hold above the August low, while volume points to buying interest that could support higher prices in coming months. By itself, the two-month price action looks dangerous and disorganized, but it's a different story when placed in context with the 2008 high (note the red line on the chart above). The stock tested resistance between February and July, finally selling off into the mid-$40s. The consolidation across the 200-day EMA could mark the initial stage of a higher low that generates a cup-and-handle breakout pattern. However, it's early in the process and interested readers have plenty of time to watch this pattern unfold before considering a new position. Finally, let's talk about the airlines, which have been down in the dumps for years now. That might be changing, as a few major carriers have been moving higher in new rally attempts. It doesn't take a rocket scientist to figure out why this group is firming up right now: Lower fuel costs are underpinning quarterly revenues, despite a weakening economy. United Continental (UAL) -- Monthly Source: eSignal View Chart » United Continental (UAL) is the stock to watch in this regard, as it has held up better than the broad market in the last two months. It hit a two-year high near $30 in October, and entered a downtrend that ended near a 15-month low in August. The stock ground through a six-week basing pattern in the upper teens and headed higher earlier this month. The stock is now testing resistance at the 200-day EMA, which will take time to overcome. However, accumulation is rising slowly, as cautious investors move back into the sector after a long period on the sidelines. The real challenge will come if the stock can get up to $25, where a breakout over the declining highs trendline would set the stage for a bull-market advance.

Looking for Tells in the Transports

The Dow Jones Transportation Average could reclaim broken support this week.

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