While market pundits like to say last week’s continued pullback can be blamed on the 12-year lows in oil, the Transports have been a drag on the overall market for two months.
For background, here was my commentary to my Momentum Options subscribers from Dec. 28: “The Dow Jones Transportation Average ($TRAN, 7,622, up 12) is still in a funk with the major moving averages sloping lower throughout December. Recent support at 7,400 was tested and held but there are several layers of resistance ahead. The first layers are at 7,700-7,800 followed by 8,000 and the 50/100-day moving averages. A close below 7,400-7,350 would be a very bearish development going forward.”
The $TRAN broke below these key levels of support to start the year. The index has now dropped more than 1,000 points since late December, with Friday’s low reaching 6,560. Resistance is at 6,800–7,000.
While there could be a short-term rebound, the major moving averages are still in a downtrend and are picking up steam. This technical damage will take a long time to reverse and is why any rallies can’t be trusted until 8,000 is cleared. This would require a move back above the 50- and 100-day moving averages.
The 3-year chart below shows risk to 6,500 with risk to 6,250–6,000 over the near-term, or, at some point this year.
Shares of United Parcel Service, Inc. (UPS) have also suffered on the pullback in the Transports. The chart shows the recent pullback from $105 to $90, with a death cross in the process of forming. Shares traded to a 52-week low of $88.42 on Friday before holding support at $90. Short-term resistance is at $92–$93.
The UPS 3-year chart shows risk to $87.50–$85 if support fails to hold. To capitalize on continued weakness, bearish traders can target the UPS February 85 puts (UPS160219P00085000) if shares fail to hold $88.25–$88.
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