Transports Overbought But Upside Remains After Pause

One of the key group of stocks participating in the most recent rally off the November 2012 lows are the transportation stocks.  The S&P 500 since reaching a reaction low on November 16th has shot higher by a little over 10% if measured on a daily closing basis.  The transportation stocks as measured by the Dow Jones Transportation Average Index Fund etf (IYT) in comparison rocketed higher by close to 18% over the same time period.  Most components of the Dow Transports of course rose as well, stocks such as FedEx (FDX), Union Pacific Corporation (UNP) and Kansas City Southern (KSU) all had double digit returns off the November lows.

To get some perspective on where the transportation stocks now stand let’s flip through a few charts;

Going from bigger picture to closer-up as I usually do in my analysis, let’s first note on the weekly chart of the Dow Jones Transportation Average Index Fund etf (IYT) that it has reached a new all time high in January.  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 index first broke out of the bull flag in December 2012, after which it came back some to re-test 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, the index has a high probability to pause this incline for a while.

Very close up now, over the past few days, many of the Dow Transportation Index components have been flashing further cautionary signals via their daily candlesticks.  FedEx (FDX) for example over the past four trading days has shaped a near-term toppy formation with a doji, a hanging man, and an inside day candle.  If this sounds too technical, just look at the past 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 Souther (KSU) just yesterday flashed a shooting star candle, something which 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 Dow Jones Transportation Average Index Fund etf (IYT) itself  could easily correct 5% and still remain in a very defined up-trend.  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 as well as the index have happened, which was the buy signal.  Any correction now may be bought for more upside into later Q1 2012.

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