Oil Isn't the Reason Transports Are Hurting

Economic weakness appears to be the culprit, not energy prices.
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This column was originally published on RealMoney on Aug. 10 at 10:46 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

On Wednesday, a reader asked me whether the recent breakdown in the Dow Jones Transportation Average is a bearish development for the broader market.

I wrote about the importance of the

transport average a few weeks ago, noting that the 4,500 level was critical support.

This issue has received significant attention lately;

Barry Ritholz

worked a chart into Columnist Conversation on Thursday, and

Helene Meisler wrote about it Tuesday in one of her typically excellent columns.

There is no avoiding the reality that the transportation sector is really hurting now.

But what does this mean?

If we take the transportation sector to be a proxy for economic health, then the economy is under the weather.

Planes, trains and automobiles transport people and goods for consumption, so if these companies are struggling, the logical conclusion is that business is down.

Now, an alternative explanation is that rising oil prices are taking a toll on earnings in the transportation sector, so equating sector weakness with economic weakness is just a red herring.

Let's take a quick look at the transportation average along with the

U.S. Oil Fund

(USO) - Get Report

, which is a proxy for oil prices. (See first chart below.)

We can see that, if anything, the link between oil prices and the transportation sector has been direct rather than inverse.

Rising oil prices haven't hurt the trannies one bit.

However, over the past month, oil has remained pretty static while the transportation sector has struggled.

As such, I can't find much support for a linkage between oil prices and transportation stocks.

That leads me back to equating the fortunes of our economy with the health of the transportation average.

Let's look at some reader requests.

In

November I wrote that the uptrend in

China Mobile

(CHL) - Get Report

was intact. I'll reiterate that sentiment.

The recent breakout above the May high of around $30 occurred after a fairly deep pullback that flushed out a lot of profit-taking. It looks as if China Mobile will continue to move higher from here, so if you're long, consider a trailing stop. And if you're looking for a buy point, I'd suggest waiting for a pullback because the stock can fall more than 10% from present levels before testing the breakout. Add a little room to allow for some price gyrations and you're left with a relatively wide stop that's well below current prices.

As such, this is what I call a "high risk" entry. Yes, the trend is higher, but now is not the ideal time to buy.

NewMarket

(NEU) - Get Report

tested its May high Wednesday, but reversed on relatively high volume. So far, this is a rejection of the advance and indicates significant supply at $60. As such, I wouldn't be a buyer until that dynamic changes.

If you're a nimble trader, you might consider a short here, but the trend is still up, so keep those stops just above current resistance.

SimpleTech

(STEC)

looks a bit overbought. But after the dramatic rally over the past few weeks, it is telling that this consolidation is on low volume. That's an indication of a lack of profit taking. Instead, the bulls are just standing pat and holding onto their stock.

I've drawn the levels that I see as important. If you're long, then consider a move below Tuesday's low as a sign to take some off the table. And if you are on the sidelines, consider a move above Wednesday's high as an "all clear" signal.

Freescale Semiconductor

(FSL)

really looks like it's rolling over. But here's the problem -- it also looked like it was about to last year from February through April and July through October. I wouldn't let this bit of weakness push me away.

We can see definitive support at $26. If that level breaks down, I'd be a seller. But I'd also watch this for an upside breakout above resistance.

Aqua America

(WTR) - Get Report

has been a true channeling stock, moving between $21.50 and $23.50 with the stochastic oscillator in perfect sync. That's not enough of a trading range to really present much opportunity.

I'd just keep an eye on it and wait for the channel to break down. If the stock breaks out to the upside, the

price by volume bars show that little overhang exists until around $27. That would be my upside target on a breakout.

Be careful out there.

At the time of publication, Fitzpatrick was long the U.S. Oil Fund, though positions may change at any time.

Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;

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