Trader: Haulage sector

The number of goods being carted around provides a good clue as to the outlook for the economy. If more cargo is being shipped, it suggests businesses and consumers are growing in confidence and placing orders for merchandise.

But, after a sharp pick-up in activity in 2009, US railroads have been less busy just lately. Albert Edwards of Société Générale recently warned that this could signify a stalling of the early-stage cyclical upturn in the world economy.

If this bearish analysis is correct, it threatens to undermine the progress of cyclically-sensitive areas of the stock market here. The FTSE Industrial Transportation sector – an assortment of port operators, aviation, haulage and delivery companies – more than doubled between February and September. Since then, it too has shown signs of stalling. The sector’s constituents are all small or medium-sized companies, which would tend to do worse than average in a broad stock-market downturn.

However, in spite of the sector’s lack of price progress since September, there are some bright spots on its chart. The falls it has suffered lately qualify as reactions against an uptrend, rather than a true downtrend. Also, it has just broken above the top of its weekly Ichimoku cloud at 1,964. If it can pierce through 2,123, a run towards the 34-month exponential moving average (2,261 today) and the Fibonacci retracement level at 2,294 might follow. A strong rally – which cannot be excluded – would target 2,495.

But my Elliott-wave interpretation of Industrial Transport’s chart suggests that its bear market that began in late 2006 is not yet completed. So, once the current move expires, a multi-month move to the downside could be in order. This should take the sector below its 1,021 lows of earlier this year, probably towards 944. A sharp decisive move through 1,858 and then 1,575 would indicate this process was underway. I remain on guard for a new price peak unaccompanied by an equivalent high in weekly momentum readings.