The Transportation Index plunged beneath key support, after making a large run-up in price that was quite impressive.  Let’s look at $TRAN, railroad stock CSX, and the XAL Airline Index.

Transportation Index:

We see the powerful and strong uptrend that has developed throughout the year coming into doubt recently, thanks to a ‘three-swing’ or ‘three-push up’ pattern complete with a negative momentum divergence (and two new momentum lows).

In fact, our momentum oscillator just registered its lowest reading of the year, as price broke through trendline support (not drawn), and the 20 and 50 period moving averages.  Today, price is rallying back, but let’s see if we can overcome these hurdles and close strongly above the 50.  My guess is that we’re poised to test the flat 200 period average soon.

Next, railroad stock CSX has held up strong in this environment, but it too has the potential of being ‘derailed’:

Notice the mighty and powerful uptrend that has sustained itself throughout 2008.

Price made an almost continual rise from mid-March until late May, but now a few key momentum divergences are starting to catch up with the stock as the buyers have temporarily dropped the ball.

Although price broke the strongly rising 20 period moving average, the 50 period seems to have contained the downward swing so far.  The question is - will it hold or not?

Finally, let’s look at the horrific spiral of the Airline Index (XAL):

While the broader Transportation Index is the picture of a powerful uptrend, ironically its component the Airline Index is the perfect picture of a downtrend.

Notice how the 20 period EMA has contained the price all the way down.  The 50 period has comfortably rested above the price, and has not come into play since early February.  With the potential for soaring gas prices, expect this index to be under further pressure.

One may ask, “How much further can an index go, if it’s already at 18?”  The answer is of course unknown, but if trading in these stocks, it’s probably best to wait for some sort of bottoming pattern or true trend reversal (higher high + higher low) before committing hard earned capital in an accumulation process.  That may be fine for investors, but traders need to rotate capital into stocks and sectors that are outperforming.

We’ll continue to watch these developments closely.