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The transportation sector perked up on Monday, but the group faces huge obstacles in the weeks ahead, because higher fuel prices will put a dead weight on economic growth while depressing airline and trucking profits. Only the railroads stand to benefit from the shifting environment, because they carry King Coal, which should see greater demand after Japan's nuclear accident.

Meanwhile, the shipping companies are a mixed bag, depending on the cargoes being transported across the open seas. Big boats that carry liquefied natural gas and other fuels should perform better than the bulk carriers, which are proxies for worldwide industrial demand. This disparity isn't likely to change until crude oil reverses gears and drops back into the mid-$80s.

Transports, Daily Source: eSignal

The Dow Jones Transportation Average (TRAN) is caught in the middle of this tug and pull, showing violent price swings in the last two months but little directional movement. In fact, the index is now trading at the same price level it struck on the last day of 2010. Notably, this zero performance has taken the outline of a possible head-and-shoulders topping pattern.

This is obviously bearish, but the index had plenty of opportunity to break down in the last two weeks but held the 4900 level before bouncing back with the broad market on Monday. This mixed action might be carving out a second right shoulder, which would be an unusual but a recognized variation of the classic head-and-shoulders pattern.

For obvious reasons, it makes sense to keep exposure light until this trading range breaks, higher or lower. Short-sellers can get on board if price violates the blue neckline, but after a breakout to a new high, potential buyers should remain cautious, because that rally will also complete a bearish megaphone, defined by the upper red trendline. This dangerous pattern often precedes a major failure, so I recommend avoiding long exposure until price clears that line of resistance.

Airlines have enjoyed a few rally days in the last few weeks, but the group is toxic as long as crude oil trades in triple digits. Higher fuel costs will go straight to their bottom lines in the second quarter, while passenger loads drop, as a result of surcharges and fare increases. In addition, the sector faces stiff competition from web conferencing services, such as

Citrix Systems' GoToMeeting, which provide inexpensive alternatives to physical travel.

Delta Air Lines

(DAL) - Get Delta Air Lines Inc. Report

has a new ad campaign touting the benefits of its 2010 merger with Northwest Airlines, but it looks as though public and institutional shareholders aren't convinced and are selling the stock. Looking back, it topped out at a two-year high near $15 in April of last year, ground sideways for six months and then printed a lower high in November.

Price action since that time has carved out an ominous-looking double top pattern, with November support (blue line) at $9.60. The stock sold off to that level on March 4, bounced up to the 50-day moving average and then rolled over, retesting the low last week. This failure has weakened support even further, suggesting a breakdown that eventually drops price down to a measured move target near $5.

The packaging companies are canaries in the economic coal mine, because their sales patterns are leading indicators of worldwide business activity. That's why it's troublesome that

United Parcel Service

(UPS) - Get United Parcel Service Inc. Report


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(FDX) - Get FedEx Corporation Report

show little upward progress since last November and are now struggling to hold intermediate support levels.

FDX Daily Source: eSignal

FedEx has been underperforming its rival since jumping over two-month resistance at $96 in February and then dropping like a rock. The decline came to rest at the 200-day moving average, but the stock has struggled for the last month, posting two lower lows. This price action shows the outline of a declining channel (blue lines), with resistance at the 50-day moving average.

The technical outlook will brighten if price can rally back into the November into February trading range (red lines). That will take a buying spike over the lower line at $91.50. On the flip side, selling pressure could be severe if the stock breaks 200-day moving average support, because that event would yield a downside target at the 2010 low near $70.

Railroads lead the transportation sector, but that doesn't make them immune from world events, or Mother Nature, as

Canadian Pacific

(CP) - Get Canadian Pacific Railway Limited Report

illustrated on Tuesday when it lowered first-quarter guidance because of severe winter weather. While southbound trains might look like the best bet right now, the entire group is well-positioned to outperform the broad market in the months ahead.

KSU Daily Source: eSignal

Kansas City Southern

(KSU) - Get Kansas City Southern Report

rallied to $55.90 (blue line) in 2008 and sold off during the bear market. It bottomed at $12.25 in early 2009 and then bounced in a strong recovery that returned to the high in February. The stock nosed above resistance, hit an all-time high at $56.98 and then got hit by a wall of selling pressure. The subsequent decline broke the 50-day moving average last week.

The stock popped back above support on Monday, in an uptick that might signal the end of the five-week downturn. This is great news, because the next rally to resistance will complete a multiyear cup-and-handle pattern. It could take several more months, but a cup-and-handle breakout has the potential to trigger a strong rally into the $80s.

At the time of publication, Farley had no positions in 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

The Daily Swing Trade

, a premium product from that outlines his charts and analysis. Farley has also been featured in





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. He has written two books:

The Master Swing Trader


The Master Swing Trader Toolkit: The Market Survival Guide

, 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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