3 Charts That Suggest Transport Stocks Are Headed South

Transportation stocks experienced a strong uptrend from early 2016 through most of 2018. Followers of technical analysis and Dow theory tend to keep a particularly close eye on this sector because it is often looked to as a leading indicator for how the broader market is expected to perform.

As you'll read below, increased selling pressure over the past couple of months has sent the price of major transportation assets below key levels of support and has triggered several long-term sell signals. We'll take a look at the specific levels traders will be watching and attempt to determine how traders will try to position themselves over the weeks and months ahead.

Active traders who seek to gauge the performance of a major market segment such as transportation often turn to widely followed exchange-traded funds (ETFs) such as the iShares Transportation Average ETF (IYT). As the name suggests, this fund comprises holdings from across the sector and is particularity useful for those looking to buy into U.S. airlines, railroads and trucking companies.

Taking a look at the chart below, you can see that the fund has been trading along a prominent uptrend for most of 2017 through 2018, but recent weakness forced the price to drop below the long-term support of an ascending trendline and the 200-day moving average. The breakdown is a clear signal of a trend reversal, and many active traders will look to the bearish crossover between the 50-day and 200-day moving averages, known as a death cross, to mark the beginning of a long-term downtrend.

Trendlines are a favorite tool for many followers of technical analysis because they can be used to identify securities that are stuck within a defined range, known as a channel. These patterns are so widely followed because they offer traders with defined points of entry and exit.

As you can see from the chart of FedEx Corporation (FDX), the stock has been stuck within a descending channel for most of 2018. Traders will want to take note of this pattern because the recent close below $200 suggests that the downtrend is gaining momentum and that the lower trendline will likely act as a level of resistance on attempted bounces. From a risk management perspective, bearish traders will likely look to protect their positions by placing stop-loss orders above $200 or the 50-day moving average ($216.56), depending on risk tolerance.

Railroads are often slower to follow the moves of the broader transportation sector given the nature of their underlying businesses. With that said, it is interesting to take note of the chart of Union Pacific Corporation (UNP) because it recently closed below the support of its 200-day moving average. The break below key levels of support will be regarded as a shift in fundamentals and technically as a sign of a major trend reversal. The bears will likely set stop-loss orders above $144 or $148, depending on risk tolerance.

Transportation stocks are often regarded as a leading indicator of the broader markets and closely followed by the active trading community. The recent breakdowns shown on the charts above are likely to be used by traders to suggest that the bearish conviction that has been dominant in recent weeks is likely to get stronger and that continued weakness is likely for the first part of 2019.

At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.