Short Plays in the Overbought Transportation Sector -- UPS, Ford and More

The transports have been outperforming the broader market for the last two months, but that relationship may be ready to moderate.

There are several shorting opportunities that could benefit from the realignment. Let's turn to the charts.

The iShares Transportation Average ETF (IYT) had been basing under a declining trend line since the middle of 2015, but last month it broke above that resistance and powered sharply higher, taking out its 2014 all-time high.

At the top of the IYT chart is a graph of its performance relative to the S&P 500 index, which shows the outperformance of the fund over the last two months. The relative strength index at the bottom of the chart, however, moved into an overbought condition and above the 80 level for the first time since 2013. The graph below it illustrates a 16% diversion of the daily price over the 200-day moving average of price.

These readings suggest the ETF is overbought and the rally is near exhaustion.

A technical look at stocks in key components of the fund present shorting opportunities that could profit from a pullback in the transportation sector.

Union Pacific

The Union Pacific (UNP) chart shows the railroad stock dipping below its 50-day moving average in October and then reversing dramatically in November, recapturing the average and moving on to its high this month.

Over the last two weeks, Union Pacific has been consolidating by making a series of lower highs above support at the $102.50 level, and forming a triangle pattern.

The relative strength index has crossed out of an overbought condition, and moving average convergence/divergence has made a bearish crossover. These are reflections of the decline in price momentum, and they have been accompanied by a decline in positive money flow. The Chaikin money flow index has moved quickly into negative territory and the money flow index, a volume-based relative strength indicator, is below its center line.

The stock is a short candidate after a lower candle close below the horizontal support line, using a trailing buy-to-cover stop.

American Airlines

On the chart of American Airlines (AAL) , there was a golden cross in October,  when the 50-day moving average moved over the 200-day moving average. The stock price advanced higher, then moved laterally at the end of November, and then broke through that lateral resistance this month.

This stock has also formed a triangle pattern that is defined by large upper shadow candles which highlight its inability to hold higher levels.

Moving average convergence/divergence has been tracking in bearish divergence to price for the last month, and the relative strength index has crossed out of its oversold zone. Accumulation/distribution is below its signal line, and Chaikin money flow is in negative territory, reflecting distribution during this consolidation period.

A lower close break below the support zone is a short opportunity using a trailing buy-to-cover stop.

Ford Motor

The Ford Motor (F) chart shows the stock moving below a three-year downtrend line which it retested earlier this month. It has since pulled back to a nexus of support consisting of the 200-day moving average, horizontal resistance-turned-support, and an uptrend line drawn off the lows of the November rally.

Moving average convergence/divergence has made a bearish crossover, and the relative strength moved out of an oversold condition and continued lower.

The money flow indications are pointing towards selling pressure into the recent high, and a lower candle close that takes out the intersection of support is a short entry point, using a trailing buy-to-cover stop.

United Parcel Service

A modified bearish eveningstar pattern has formed on the United Parcel Service (UPS) chart at its December high. This three-period pattern consists of a large up candle, in this case two candles, which is followed by a narrow opening and closing range "doji" candle, and completed by a large down candle,. It represents a transition from bullishness to bearishness.

This pattern formed on a short-term uptrend line which was broken last week on large volume. The vortex indicator, designed to identify early shifts in trend direction, is preparing to make a bearish green-under-red crossover, and the stochastic oscillator has dropped below its center line.

Accumulation/distribution is retesting its signal average, and the Chaikin oscillator, which uses a three- and 10-day average of the Chaikin money flow index in its computation, has moved under its signal average and down to its center line. The stock is a short candidate after a lower candle close below the $115.75 level using a trailing percentage buy-to-cover stop.

This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.

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