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HEAD & SHOULDERS


Could Transports Climb A Wall Of Worry?

04/16/08 10:06:55 AM
by Mike Carr, CMT

With the news dominated by airlines entering bankruptcy and oil stubbornly clinging to record levels, this may be a good time for contrarians to look at transportation stocks.

Security:   IYT
Position:   Buy

It would be difficult to imagine the news getting much worse for transportation companies. And all of this bad news may provide the proverbial "wall of worry" for these stocks to climb higher in the coming months. Fundamentals are showing value in this sector, with the average transportation stock trading at 0.84 times sales, compared to a market multiple of 1.33. These stocks should also do well in a recovering economy, since industrial output would pick up, which means more shipments.


Despite the promising fundamentals, there is a great deal of risk within this sector. As Frontier Airlines demonstrated, business conditions can change quickly in the current environment. The best way to guard against unique company risks is through diversification, and iShares Dow Jones Transportation Average (IYT) offers that by owning 20 stocks. The chart of IYT (Figure 1) is bullish.


FIGURE 1: IYT, WEEKLY. Here, IYT has completed an inverted head & shoulders and has a very favorable seasonal tendency at this time of year.
Graphic provided by: Trade Navigator.
 
We can see that IYT is testing the neckline of an inverted head & shoulders pattern. A throwback after a breakout is normal, and healthy. The measured objective of this pattern, at 98, sits just above old highs. An additional factor is the bullish seasonal trend for IYT. Since it began trading, this exchange traded fund (ETF) has traded up 100% of the time in the 16th trading week of the year, and May is seasonally the strongest month for this stock. Combined with the recent breakout, this is an ideal time to buy IYT.


At the current level, IYT offers a low-risk entry with good upside potential. A close below 84 would put prices back into the pattern and indicate that this trade setup has failed.




Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

Website: www.moneynews.com/blogs/MichaelCarr/id-73
E-mail address: marketstrategist@gmail.com

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