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Transports Could Break Out

The rails may take the lead during a new bull leg in the transports.
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The Dow Jones Transportation Average may be entering the early stage of a rally. The index has been moving steadily higher following last week's early weakness and, at Tuesday's settle, was showing signs of a potential breakout. Since the February highs, the trannies have been working through a healthy pullback tracing out a bullish flag in the process. Two days ago, the index took out the upper band of the consolidation and now appears headed for a retest of the 2012 highs.

The transports reached key support after five weeks of light-volume fade. This area, just above the 5050 level, had previously capped the October and early December highs. The initial peak followed a massive recovery rally off the spike lows left behind on Oct. 4. After a massive volume surge last November, this level was tested again but was not ready to give way. A shallow pullback as the year came to an end set the stage for the second leg of the October bull run. From the mid December lows to the early February peak, the index tacked on nearly 700 points.

After the healthy pullback to the old highs, the transport picture is becoming quite bullish again. I believe a run back up to the 2012 highs is under way, one that could play out fairly quickly.

Dow Jones Transportation Average

Source: TradeStation

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In an earlier post, Doug mentioned a new position in CSX Corporation (CSX). The third-largest railroad operator in the sector is up over 7% in very heavy trade. I'm looking in the rails for other long opportunities. They may take the lead during a new bull leg in the transports.

At the time of publication, Morrow had no positions in any stocks mentioned.