History shows that the Dow Transports consistently outperform in the March-to-May time frame. Here we explore six attractive long set-ups, each with manageable risk and promising upside potential.
The Dow Jones Transportation Average has been one of the strongest market averages since the 2009 lows, up 138% versus just 94% for the S&P 500. The plunge in the Transports on February 22 had me concerned, as the relative performance analysis (RS) had been deteriorating since the latter part of January (see “Dow Transports Lagging”). By early March, with the Transports 5% below the highs, the RS analysis started to improve. On the sharp decline last week, the Transports held up better than the other major averages, suggesting it is time again to look at the Transports.
Figure 1
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When I came across an article in the Financial Post, I recalled that other experts in seasonal patterns had also mentioned this seasonal strength in past years. It also dovetailed nicely with my technical work on the Dow Jones Transportation Average and several of the transport-related stocks.
Strategy: Since the period of seasonal strength typically lasts through May and sometimes early June, a more nimble strategy is advised. In some cases, a more aggressive buying strategy and tighter stops will be recommended, and I will give targets where half the position should be sold. Sometimes these levels will be below the recent highs. If the sell zones are hit, then I would recommend moving the stops at least to breakeven on the remaining position so as to lock in a profit.
Figure 2
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The weekly chart of the Dow Jones Transportation Average shows the broad trading range of the past few months between resistance at 5300 and support at 4900. On a break below the 4900 level, the 38.2% support from last summer's lows comes in at 4722 with weekly uptrend (line a) at 4613 this week.
An 8% rally from the March lows would take the Transports back to February highs in the 5300 area. The 127.2% retracement target calculated from the February highs to the March lows is at 5440. The weekly on-balance volume (OBV) has continued to act stronger than prices and recently made further new highs (line b).
The chart of the iShares Dow Jones Transportation ETF (IYT) shows the broad trading range with trend line support at $88.50 just below last week's lows at $88.90. There is additional chart support and the 38.2% retracement level at $87.19. The daily OBV has already moved above the February highs and has short-term support at line d. A break below this support would be the indication that we were going to see a deeper correction. On the other hand, a strong close above $93.92 would be very positive and set the stage for a test of the previous highs at $96.30. The 127.2% target for IYT is at $98.40.
How to Profit: I think that the individual transportation stocks are likely to perform much better over the next two months than an ETF. For IYT, I would buy at $91.34 with a stop at $88.52 (risk of approx. 3.1%). Sell half the position at $95.14 and raise the stop on the remaining position to breakeven.
Figure 3
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Having lived for many years in Hawaii, Alexander & Baldwin Inc. (ALEX) is a stock I have long followed. Though ALEX does provide transportation services, the company also has interests in agribusiness and real estate. The weekly chart shows that the correction from the highs made earlier in the year at $44.34 has brought ALEX back to good support at the weekly uptrend ( line b) and the 2010 highs, line a. The 38.2% retracement support is at $38.50 with the 50% support at $36.65. There is minor resistance now at $42.35 and a close above $43.31 would complete the corrective pattern. The 127.2% retracement target is just below $46. The OBV did confirm the new highs this year, as it has moved well above the strong resistance at line c. The OBV is now trying to turn up from its rising weighted moving average (WMA), which is a very bullish sign.
How to Profit: ALEX has one of the more attractive set-ups, and I would buy at $41.14 with a stop at $38.83 (risk of approx. 5.6%). On a move above $43.10, raise the stop to $39.78. Sell half the position at $45.44 and raise the stop on the remaining position to breakeven.
Figure 4
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One of the airline stocks I like is Southwest Airlines (LUV). Though there are always concerns about the airlines when energy prices are rising, for now it seems as though they are able to pass the additional costs on to the consumer. LUV has been in a broad trading range for the past 18 months even though it made a marginal new high late in 2010. The longer-term uptrend from the 2009 lows, line b, was broken in late 2010 and a move back above it (currently at $12.80) is needed to reassert the uptrend.
The weekly chart has short-term support in the $11.50 area. The major 38.2% support level is at $10.79, while it would take a weekly close below $10.42 to indicate that a double top had been completed. One of the reasons why I don’t feel a double top is being formed is the action of the OBV. The weekly OBV has led prices higher, making new highs in January even though prices were substantially lower.
How to Profit: I would go long LUV at $12.26 or better with a stop at $11.48 (risk of approx. 6.4%). Sell half the position at $13.36 and raise the stop on the remaining position to breakeven.
For read about the other three transport stocks I like - click here
To learn more about using On-Balance -Volume, read this article