Some Transports Are on the Right Track

Transportation stocks face the conflicting effects of a deep recession and plunging oil prices in 2009. These opposing forces will dampen performance in many sector components, but a few subgroups could do quite well in the mixed environment. Let's review the current status of these issues and try to identify potential winners.

Dow Jones Transportation Average

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Source: eSignal

The Dow Jones Transportation Average posted a double top at 5500 between 2007 and 2008, then broke substantial support at 4100 in October. The subsequent plunge dropped the index nearly 30% in just seven weeks before it came to rest at 2909 in mid-November. It's been moving higher since that time in a choppy recovery effort.

Accumulation has perked up in the last few weeks, along with higher prices, but the technicals still don't confirm the sponsorship needed to break the grip of the ugly downtrend. However, conditions are in place for a countertrend rally that works off the excesses of the selloff and lifts the index into broad resistance above 4000.

Let's subdivide this unique sector into specific zones of American commerce and see how they're holding up in the current environment. We'll start with the airlines, which are showing considerable leadership after the terrible pounding they took when crude oil and jet fuel spiraled up to historic price levels earlier this year.

Airlines

Amex Airline Index

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Source: eSignal

The Amex Airline Index (XAL) bottomed out five months ago, with a sharp upswing after a selloff to historic lows. That bounce stalled at 28 and rolled over, retracing the four-week gains. The seesaw pattern has continued into December, with the index carving out an ascending triangle. The instrument closed out last week at the dead center of this basing pattern.

Price has now entered the fifth wave of the long consolidation pattern. This swing usually precedes a strong breakout or breakdown, so we could be right at the cusp of a large-scale countertrend rally. However, I don't recommend direct sector plays because component performance is so erratic. Instead, concentrate on the group's top performers.

Alaska Airline Group (ALK - commentary - Cramer's Take) is a current pick in my newsletter, The Daily Swing Trade and is an excellent choice to ride out this bounce. You'll also find interesting long-side opportunities in Delta Airlines (DAL - commentary - Cramer's Take) and Republic Airways (RJET - commentary - Cramer's Take).

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At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Farley is also the author of The Daily Swing Trade, a premium product that outlines his charts and analysis. Farley has also been featured in Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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