Transportation stocks are one of the key groups participating in the most recent rally off the November 2012 lows.
Since reaching a reaction low on Nov. 16, the S&P 500 has shot roughly 10% higher if measured on a daily closing basis. In comparison, the transportation stocks — as measured by the iShares Dow Jones Transportation Average Index ETF (NYSE:IYT) — rocketed higher by about 18% during the same time period. Most components of the Dow Transports naturally rose as well; stocks such as FedEx (NYSE:FDX), Union Pacific (NYSE:UNP) and Kansas City Southern (NYSE:KSU) all had double-digit returns off the November lows.
To get some perspective on where the transportation stocks stand, let’s flip through a few charts.
Going from bigger-picture to closer-up (as I usually do), let’s first note that the IYT has reached a new all-time high this month. After trading in a range for most of 2012 — which actually served as a classic bull flag formation — the index started a steep and powerful breakout.
On the daily chart below, this can be seen a little more closely. The IYT first broke out of the bull flag in December 2012, after which it came back some to retest the breakout level before ultimately powering higher. This, by all means, classifies as a textbook breakout.
At the same time, nearer-term — and especially if we consider the almost vertical move in January, as well as the seriously overbought momentum indicators such as stochastics — there’s a high probability the ETF’s incline will pause for a while.
Very close up now, over the past few days, many of the Dow Transportation components have been flashing further cautionary signals via their daily candlesticks. FedEx, for example, has shaped a near-term toppy formation with a doji, a hanging man and an inside day candle over the past four trading days.
If this sounds too technical, just look at these candles from the past few days and note how they look more dramatic than some of the ones prior in January.
Railroad transportation giant Kansas City Southern just yesterday flashed a shooting star candle — something many traders look to for confirmation of the top of a trend, at least for the near-term.
Most of the stocks in the transportation segment — and thus also the IYT itself — could easily correct 5% and still remain in a very defined uptrend. In fact, a little consolidation here sooner rather than later would allow these stocks to then again better setup for more upside.
The big breakout in most of these stocks and the index has happened, which was the buy signal. Any correction now may be bought for more upside into later Q1 2012.