So far these last couple of weeks, we have written and talked about trading ranges, January calendar ranges, inflation, stagflation and precious metals. We have also talked and written about the Transportation sector as the prime example of not only trading ranges, but also why we believe the market will hold trading range support levels. Plus, we have talked IYT as the best hope for the economy, both because of the eventual end of COVID and the infrastructure package.
There are 3 reasons to focus on Transportation.
- IYT has upheld support thus far.
- IYT the ETF, could have a mean reversion trade (will explain).
- IYT can prosper from inflation to a degree.
Looking at the support level, IYT is sitting on the 200-day daily moving average. More importantly, IYT is holding the 50-week moving average, well outperforming some of the other members of the Economic Modern Family -- Retail (XRT), Biotechnology (IBB) and the Small Caps Index (IWM).
Secondly, looking at the chart and our proprietary indicators, IYT looks ripe for a mean reversion. A mean reversion trade implies that a stock's price has traded to an extreme low (or extreme high) and that the price has a strong probablitity of returning to its normal pattern.
On our proprietary software, we measure the mean reversion when momentum, using the dotted line on Real Motion indicator, crosses below the Bollinger Band, or the dashes. Then, we wait to see if the dotted line can cross back over the BB. Furthermore, the price on the price chart above, which broke below the green Bollinger Band, now needs to close above it. Hence, the work is not done. IYT must move up in momentum and in price, clearing over 263. Then, the risk to Wednesday's low is clear.
Transportation is a key barometer to watch and potentially trade to take advantage of these support levels. Even in an inflationary time, with low supply and rising demand, that "hoarding" mentaility can continue to move goods along to a point of course. Furthermore, we still see an endgame for COVID -- that should surely give a boost to underperforming sectors in IYT, particularly airlines and cruise ships.
Of course, the advantage of trading ranges is that, when they break, you have a low risk and quick exit, plus the understanding that patience is your friend until a new support level proves out.
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- S&P 500 (SPY): 450 major support.
- Russell 2000 (IWM): 204-205 major support; back over 216 better.
- Dow (DIA): 350 major support.
- Nasdaq (QQQ): 365 the 200-DMA support.
- KRE (Regional Banks): 73.00 a buy area to watch for.
- SMH (Semiconductors): 287.00 support then 269.
- IYT (Transportation): 260 the 50-WMA major point to hold.
- IBB (Biotechnology): 128 major support.
- XRT (Retail): 80 support to hold-back over 85 better.
Director of Trading Research and Education