Transportation stocks have been deteriorating rapidly this month, signaling
in sector components that had been bulletproof until this point in the four-month correction. The downturn tells us that institutional players looking for a double-dip recession are getting more aggressive with new positions.
Of course, the transports are hardly a monolithic group -- a few subsectors usually show persistent leadership as one or two lag far behind. But strong correlation is developing across this peculiar universe of airline, packaging and shipping companies, pointing to broad selling strategies that could persist well into the fourth quarter.
iShares Dow Jones Transportation Average
stalled at a 19-month high in late April, just four days before the May flash crash signaled the start of a correction that's still in progress. A series of lower lows (see circles in the chart above) has unfolded following that volatile event, with the decline having found support near $70 in early July.
The fund bounced back to the June high a few weeks later and then sold off with the broad market. This downswing has been gathering momentum since the fund's failure to hold support at the 200-day moving average following an eight-day testing period. Tuesday's breakdown has brought the price under that critical level for the first time in five weeks.
Volume has shown slow and steady distribution since March, with no obvious panic in the current tape. The target for this downswing lies at the July low, which must hold if the sector has a chance to recover as we head into September and October. That might be a tall order, given that all recent economic data is showing a weakening recovery.
The airline group has been the sector's leading performer in 2010, but I've had my doubts about it, as noted in a
. These former high flyers were standout laggards amid last week's options expiration, and they have lost even more ground so far this week. It's especially ominous that the current downturn is taking place at the same time that crude oil has dropped to a seven-week low.
The Amex Airline Index (XAL) recovered strongly off the bear market low, hitting a two-year high at 41 in April of this year. It posted two nominal higher highs, in June and early August, and then sold off in two waves. The index has now dropped under the 50-day moving average and most likely headed for the 200-day moving average, currently near 35.
This chart is deceiving because the two strongest stocks in the group,
( UAUA) (parent company of United Airlines) and
, are awaiting government approval of their merger. This pending event is keeping investors in place and those issues near their 2010 highs. Even so, these former leaders have also fallen below key support levels in the last two weeks.
It's even worse for competitors
(parent of American Airlines) and
Delta Air Lines
. All three stocks are trading at multi-month lows in grinding selloffs that are showing no signs of letting up. US Airways is relatively stronger than the other two issues, which look as though they're headed back toward fresh 52-week lows.
Packaging companies have acted relatively well through most of this wicked summer market, but they're now looking ready to break down.
is especially vulnerable despite a technical breakout on July 26, when it popped above the 200-day moving average after raising quarterly and full-year guidance.
Look at the opening price of the breakout bar (blue line). The stock traversed that level eight times and sold off Tuesday, filling the gap. This bearish action tells us that every open position bought on the bullish news is now sitting at a major loss. This overhang adds to selling pressure and will likely trigger a decline into the July low.
Trucking and Shipping
Trucking and shipping stocks round out the transportation group. Unfortunately, both sector components look as though they're headed lower right now, with nearly every major trucker sitting under its 200-day moving average. Shipping stocks are acting marginally better, but they could easily play downside catch-up in the weeks ahead.
had a great run prior to the bear market, with a rally to an all-time high at $91 in 2007 and then plunging to multiyear lows. The subsequent recovery topped out at $52 in January of this year, and the stock carved out a double-top pattern (red line) that broke to the downside in May.
Aggressive bears weren't rewarded by that breakdown, as the stock then just chopped sideways into early August, building support just above $34. That price level (blue line) gave way earlier this week, with the stock selling off to a 52-week low. Look for this nasty decline to continue with a selloff target in the mid-$20s.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of
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. He has written two books:
, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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