Repeating Fractals in the Transports

The Transportation sector has been steadily rising since August. That is until it made a new all-time high at the end of September and stalled. Since then it has entered a consolidation phase. Consolidation can resolve in either direction, to the upside or downside. Or it can continue for some time, longer than you can wait it out. So what will happen to this consolidation?

The answer might be found in a broader view. Looking further back, beyond the run off of the August low, we see a ‘W’ pattern that led into the move. The full ‘W’ with consolidation creates a fractal. This fractal shows up again in this chart with a just a slight move further back to the March through June period.

How similar are these fractals? Both lasted 4 months, both have the ‘W’, both have the rounding consolidation. The first one resolved with a move higher. A similar move up following the second would give a target to 185 in the Transportation ETF shown, $IYT. But there are some big differences in the way price is reacting now. Momentum as measured by the RSI and MACD had been steady as the first fractal resolved. This time momentum is falling in both indicators.

This does not necessarily mean the second fractal will resolve lower. But it does suggest that it may be time to add protection in case it does. Adding puts or a put spread for lower cost can give that cheaply. Or if you are uncomfortable short term reduce size or shift to a stock replacement strategy.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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