Transportation stocks are getting back in gear. Names from the sector have passed in and out of favor several times in this rally, and it looks like the bulls have gotten behind this group once again.

The concerns that have hit this sector periodically center around two themes: energy prices and domestic economic growth. With the exception of the airline stocks, we would downplay any concerns over energy prices and instead concentrate on the prospect for domestic growth.

Recent economic data has been pointing toward firming in the economy, and we have seen Treasury rates climb in response.

If the idea of an upswing in the economy takes hold with traders, then we could see an increase in liquidity flows towards the transportation stocks, particularly the rails and truckers.

Dow Transport Index

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The

Dow

Transport Index broke out from a bullish head-and-shoulders consolidation at the beginning of May. This type of consolidation and breakout suggests the index has worked off any excess created in the last run-up, and the group is ready to start another leg to the upside.

Dow Transport vs. Oil

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If we look at a chart of crude oil vs. the Dow Transport Index, we can see that since the beginning of the long-term rally in 2002, crude oil and the transportation stocks have shown a positive correlation. This tells us that the implication of economic strength in rising crude prices is much more important to transportation stocks over the long-term than the cost of energy. If the economy is strong, then transportation stocks can pass along higher energy costs. The airline sector is the one exception to this rule, and the group shows a strong inverse correlation to energy prices.

Within the transportation sector, the group getting the most attention from traders is the rails. Both

Burlington Northern

(BNI)

and

Norfolk Southern

(NSC) - Get Report

are both displaying strong technical configurations.

Burlington Northern Santa Fe

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BNI has broken out of a large bullish head-and-shoulders consolidation in the weekly uptrend. The breakout at this level shows that the bulls have taken control, and the stock is ready to resume the primary trend from this level. It is showing significant support at $85, and any pullback above that level would be a buying opportunity.

Norfolk Southern

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NSC has formed a similar pattern, but the stock has just recently resolved to the upside of the formation. The stock can be bought at this level with a good risk/reward profile. Look for the rails to lead the broader rally in the transportation sector in the coming weeks.

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At the time of publication, Scott Maragioglio had no positions in the stocks mentioned. Maragioglio had more than 15 years of technical analysis and money management experience before co-founding Epiphany Research. Epiphany Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indexes and sectors. He is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Mr. Maragioglio has also served on the board of directors of the AAPTA.