The price of oil dropped on Wednesday, and it took energy stocks down with it. Interestingly (and almost counterintuitively), transports also got hit; the iShares Dow Jones Transport. Avg. (ETF) (NYSEARCA:IYT) dropped more than 2% on the day.
This was at least in part the result of worrying comments by the CEO of freight transportation company CSX Corporation (NYSE:CSX), which said that domestic coal shipments had declined more than anticipated in the fourth quarter.
As a result, the IYT ETF left a concerning mark on its chart on Wednesday. Bears should be able to take advantage.
IYT ETF Charts
For a little perspective and background, remember that the transports had lagged the broader stock market all year, and while they also rebounded off the late-August lows, the rally too lagged the major averages. This is represented nicely on the below chart, where the IYT ETF is in red and the Dow Jones Industrial Average is the green line.
As such, Wednesday’s price weakness should be of no great surprise as the chasm between transports and the broader market once again widened. Transports at least psychologically are still seen by many investors as a leading indicator, so their relative weakness all year is thus a concerning sign.
Looking at the IYT through a multiyear lens, we note that its uptrend off the 2009 lows remains intact as it once again held as support during the August selloff. However, there now is diagonal resistance from above that the transports must try to overcome, or they risk faltering back toward the multiyear support line and eventually below.
What raises an additional red flag in all of this is the picture on the daily chart below. Note that the diagonal line of resistance from the multiyear chart above coincided with the red downsloping 200-day moving average on the daily chart below. In other words, the 200-day MA, which held as good support for years, has been resistance ever since it broke earlier this year.
Furthermore, the price action off the August lows has taken the shape of rising wedge formation of sorts, which with Wednesday’s selloff is beginning to break down.
This is not bullish by any stretch of the imagination for the time being.
Active investors could look to sell short or buy puts in the IYT ETF at current levels for an initial price target in the $135-$140 area. Any strong bullish reversal from here should stop traders out of shorts and have them look to re-short at higher prices, upon confirmation of a bearish reversal.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, Serge Berger did not hold a position in any of the aforementioned securities.
