A Trade War Could End Transport Bull Market

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A Trade War Could End Transport Bull Market

After the Trump administration switched gears and moved through with putting tariffs on Chinese imports on Tuesday, the Dow Jones Transportation Average reversed at a four-month resistance level. The sell-off is a tardy reaction to the collapse of NAFTA negotiations and the threat to slap 25% tariffs on imported cars, and it reflects rising concern about supply chain disruptions that might derail the multi-year bull market.

If recent actions are straightforward bargaining strategies that result in compromise and agreement in the next weeks, the transportation industry should rise. If the reverse were to occur, major sector components might fall 15% to 25% in a few of sessions, resulting in significant short sell gains. More significantly, that loss would activate the lows from February, paving the way for a longer-term intermediate slump that might last many months.

If NAFTA is scrapped, the railroad and trucking sectors seem to be the top prospects for short sales as they are at the center of the debate about globalization and imported commodities, particularly in North America. In the meanwhile, if a full-scale U.S.-China trade war breaks out, airlines and packaging businesses might suffer the most since fewer volumes and unfilled seats would slash profits. (Consider this article on how to analyze the transportation sector.)

After a multi-year upswing, the iShares Dow Jones Transportation Average Fund ETF (IYT) peaked at $168 in 2014 before declining to a two-year low of $115 in January 2016. After the presidential election, it swung to resistance and relaxed into a thin rising channel, which broke to the upside in December 2017. Six weeks later, the fund hit an all-time high of $206.73 before falling and rebounding off the range and 200-day exponential moving average (EMA) support area at $180.

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While three rally waves failed to break through horizontal resistance above $195, two further checks at support revealed eager buyers. After a seven-day test, the fund reversed at that level for the fourth time on Tuesday, exposing a new sell-off to range support. Since mid-April, on-balance volume (OBV) has been worse, signaling a decreasing supply of buyers and revealing a collapse that might go as low as $160. Tips for Trading the Dow Jones Transportation Average has further information.

Kansas City Southern (KSU), which runs important north-south train lines, stands to suffer the most if NAFTA fails or trade obstacles drive up the price of components made in Mexico. After the economic catastrophe of the previous decade, the stock fell to a five-year low before turning abruptly upward and beginning a strong upswing that peaked in 2013 at little over $125. aggressive selling responded to a test at that level in 2014, and the drop that followed in 2015 completed a double top collapse.

After the stock hit a three-year low in 2016, buyers started buying again. This led to two waves of rallying that petered out in November 2017 around the.786 Fibonacci sell-off retracement level. Since then, there have been two unsuccessful breakout attempts, and a holding pattern has developed while policymakers deliberate on the future of global trade. In this scenario, a break of year-long support around $99 would complete a significant collapse that might reach the high $70s, while a violation of the May low at $104.43 will send a preliminary sell signal.

Learn more about establishing your trading strategy using Fibonacci retracement levels in Chapter 6 of the Technical Analysis course on the Investopedia Academy.

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The price of American Airlines Group Inc. (AAL), which peaked in the low $60s in 2007 and remained within seven points of that high in 2015, dropped to a two-year low in June 2016. After easing into a rising channel in December 2016, the continuing upswing eventually reached 2015 resistance in January 2018. In April, it fell down and sold down to channel support, while breaching support at the 200-day EMA. A few weeks later, the sell-off came to a stop at the 2017 bottom, producing a bear flag rebound that has already surpassed 50-day EMA resistance. A flag collapse will trigger bearish continuation signs, increasing the likelihood of a fall that closes the $31.50–$33 gap from July 2016. Key Financial Ratios to Analyze Airline Companies for more information.

The Bottom Line

If the Trump administration follows through on vows to renegotiate NAFTA and apply Chinese tariffs, the transportation sector has fallen into holding patterns that might result in lucrative short sells. (Read more about the fundamentals of tariffs and trade barriers here.)

Disclosure: At the time of publishing, the author had no holdings in any of the aforementioned securities.

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