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Transportation Sector Bumping Into Resistance. Wait For a Buy Signal.

The Dow Jones Transportation Index (TRAN) has done extremely well in November. However, a retracement seems inevitable, and the depth of the retracement along with intermarket dynamics will determine whether TRAN is setting up for a buy opportunity.

Readers often ask us what exactly we are looking at to identify a buy signal. Our short answer: price behavior (chart analysis), sentiment and intermarket dynamics.

Let’s apply our answer to the TRAN index.

First, price behavior looks quite straightforward in the case of TRAN. After a run up of almost 25 percent in 6 weeks, the index is bumping into heavy resistance now. It seems inevitable for a retracement to take place at this level.

The key question will be how deep this retracement will go. The 8300 level could be tested soon, as that was the breakout level, as seen on the chart.

Investors should closely watch how other markets will react as TRAN will reach that lower level. If risk assets, primarily the Russell 2000, will retrace mildly, and volatility in stock market will be contained, then we believe TRAN could be setting up for a buy opportunity. On the other hand, ‘risk off’ sentiment in various other markets will not deliver a bullish signal for the transportation sector.

Moreover, TRAN collapsed along with crude oil. It will be key to monitor what crude will be doing as TRAN retraces in the coming days and weeks.

We don’t believe sentiment is overly positive at this point, for small caps (Russell 2000) and TRAN. That is certainly a bullish element.