As we kick off 2016 and a fresh trading year, the global markets are off to a harrowing start. Weak economic data out of China is causing that stock market to drop severely, and even led to a halt of trading. U.S. equity futures as a result are also off sharply, while Treasury bonds are getting a better bid.
While Monday morning’s market drop might not continue in a straight line, the volatility is yet another sign that 2016 will likely see more volatility than any year since 2009. Warning signs also continue to be flashed from the transportation stocks, as represented by the iShares Dow Jones Transport. Avg. (ETF) (NYSEARCA:IYT), which is hanging by a thread.
Active investors and tactical traders may find good opportunities on the short side of IYT.
On Dec. 3, I mused that the transportation stocks (and thus the IYT ETF) would be a good short both in the near-term, and six to 12 months down the road. Indeed my first downside target of $135 was reached just a few trading days later, netting us nice gains.
As a result, the bigger picture of the transportation stocks now looks worse than it did in early December, and I am reiterating my bearish call for transports in 2016.
However, I am not necessarily forecasting a straight drop into the abyss for the IYT ETF. Rather, just like what I expect for the broader stock market, we should see a much more volatile going than we have seen in recent years.
IYT ETF Charts
Looking at the multiyear weekly chart that stretches back to the 2009 lows, note that with the most recent slump, the IYT ETF has now touched the longer-term support line again. This comes after the IYT arguably got too far removed from this trendline in late 2014 and ever since only printed lower highs. Thus far the drop, which in 2015 amounted to about 18%, could be looked at as a mere mean-reversion move.
However, the more often a support/resistance line gets tested, the more severe the breakdown/breakout tends to be.
If we zoom in on the daily chart of the IYT ETF, we see this series of lower highs much clearer, as represented by the red arrows. Much weight is visibly being put on the support line that connects the late August 2015 and December lows. With Monday morning’s weakness, this line will most likely snap and a next multiday/week support line will become the mid-$120s. This area is also where horizontal support from 2013-14 comes in.
One step at a time, but through a multi-month lens the IYT etf could easily see the low $100s.
Like what you see? Sign up for our daily Beat the Bell e-letter and get Serge’s investment advice delivered to your inbox every morning! You can also download his 6 Keys for Successful Trading and Investing.
