After “handling” a 7-month consolidation period, transportation stocks appear to be moving higher again.

Two phenomena that have characterized the stock market rally over the past year and a half are 1) buy the dip, aka, BTD -- and 2) rotation. Both are evident in today’s Chart Of The Day. It shows the Dow Jones Transportation Average (DJT) finally breaking out to a new all-time high after a 7-month consolidation.

The DJT formed its previous all-time high back in 2014-2015 in the vicinity of the 9200 level. Following a brutal decline during the 2015-2016 correction, the DJT appeared to be stuck in neutral for much of last year, even as many market segments were able to ascend to new all-time highs. Following the U.S. Presidential election last fall, the transport stocks finally got back in gear again.

In about a month’s time, the DJT was able to climb roughly 15%, setting a new all-time high in the process. Since its December peak, however, the index has basically moved sideways for 7 months. That is not unusual, nor particularly unhealthy, for an index following a test of its former highs, however. The consolidation allows it go catch its breath and build up fuel to allow for a sustainable breakout to new highs, if and when it does come.

To boot, the journey that the DJT has taken over the past 2 and a half years has arguably carved out a variant “cup-&-handle” pattern. As we have discussed before, this is traditionally a bullish formation, often leading to a breakout and new leg higher. That may be under way now.

With every dip in the rally, investors appear to be more and more concerned that the bull run is over. However, until “BTD” is no longer the order of the day, there appears to be little to be concerned about in the immediate term. Once again, this week brought another “dip” in stocks, induced largely by the selloff in technology stocks over the past month. Once again, the weakness had some traders on the ropes. However, if today is an indication, BTD is still in effect, and is currently being led by the transports.

That handoff in leadership -- from techs to transports -- is another manifestation of the “rotation” still evident in this rally. When one sector stumbles, there is another to take the reins. And as long as that continues to be the case, any major damage will likely remain at bay.

At this time, one of the main beneficiaries of both BTD and rotation is the transportation sector which, after several trying years, is back on the go into all-time high ground again.

If you want this “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share. Thanks for reading!

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The nature of the bounce in transportation stocks over the past month suggests a potential re-test of the January lows.

Back on January 21, we published a post titled, “Transports Can’t Afford To Travel Any Lower”. As the title suggests, the point of the post was that transport stocks, as measured by the Dow Jones Transportation Average (DJT), had plunged to a level that should serve as substantial support. And if it did not, then we were talking about disorderly, crash-type risk potential. Fortunately for these vehicles, they heeded the sign and avoided any (further) “crashiness”. The nature of the month-long bounce since, however, has us concerned that the DJT may be running into a roadblock here soon, at least for the near-term.

Why do we say that? We have often times talked about judging the “quality” of a rally, especially following a significant decline. The quality, which includes metrics such as the breadth and the pace associated with the advance, can give a clue as to the type of rally it might be. For example, does it appear to be merely a dead-cat bounce or potentially a major reversal, etc. In this particular instance, it is the pace of the advance -- or lack thereof -- that has us skeptical about the immediate sustainability of the bounce.

We’ve spoken about “bear flags” on the blog a number of times. These occur when a bounce in prices unfolds in a much more shallow, tepid manner than the pace of the preceding decline. In these cases, the bear flag patterns typically take the form of “continuation patterns”, i.e., prices eventually “continue” in the direction they were originally headed (down). In our view, the chart of the DJT has the “look” of a bear flag.

 Up trendline

Notice the angle of ascent during the rally of the past month or so (the area shaded in red). In 17 days, the DJT has gained 6.4%. You might think that’s pretty good, especially considering the fact that many indices during this time were actually down, or close to it. That’s a fair point and it may bode well for stocks over the intermediate-term. However, in the near-term, here is why we are concerned: prior to the bounce, it took the DJT just 8 days to drop that same 6.4% (and nearly did it in just 5 days).

Therefore, the pace of the advance has paled in comparison to the prior decline. This sets up a potential “bear flag”. Thus, we are cautious regarding the potential for a swift drop that breaks the uptrend encompassed by the bear flag pattern in red. How do we know when the bear flag will stop? While we can’t know for sure, there is evidence that the bounce could run out of steam soon in the form of the following areas of potential resistance just above 7200.

The declining 50-day simple moving average

The flattening 1000-day simple moving average

The 23.6% Fibonacci Retracement of 2014-2016 decline

The 38.2% Fibonacci Retracement of November-January decline

The underside of the broken Post-2009 Up trendline

The resolution of such a break could set up a re-test of the January low which occurred at the following key levels.

The 38.2% Fibonacci Retracement of 2009-2014 Rally ~6580

The 61.8% Fibonacci Retracement of 2012-2014 Rally ~6570

Assuming such a re-test takes place, a hold at that level could produce a more durable rally than what unfolded over the past month, i.e., an intermediate-term advance spanning up to several months. Of course, the quality of the advance would have to be judged just like the present one. However, we would expect that an intermediate-term rally would be possible, within the context of a developing cyclical bear market.

First things first, however -- transport stocks need to get past this bear flag of a roadblock.

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