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Transports are heading to a new high once they top this key level, says technician

Pippa Stevens

Transportation stocks are on a roll.

The Dow Jones Transportation Average — composed of 20 airline, rail and trucking stocks — has gained nearly 20% this year, outpacing the broader market's roughly 16% rise.

The index advanced about 1% on Wednesday, pushed higher by strong earnings from companies like Kansas City Southern KSU , CSX CSX , and United Continental UAL , and is within 5% of its all-time high.

According to MKM Partners' JC O'Hara there's no sign of a slowdown for the group. After looking at the charts, O'Hara said the index might soon soar to new highs.

"I think the risk/reward setup right here is very favorable," he said Wednesday on CNBC's "Trading Nation." "If we look at the Dow Jones Industrial Transport index, you know we've seen over the last few months that this pattern has been a bullish accumulation pattern taking the shape of an inverse head and shoulders and we're actually breaking out of that pattern today," he said.


During Wednesday's trading session the index was hovering around 10,935. O'Hara believes the key level to watch is 11,000, since once the index can break above that mark "there's really not much to stop [it] from running to the 2018 highs."

The index is currently about 6% below its September 2018 all-time intraday high of 11,002.39.

The transports index is widely followed by the Street because some view it as a barometer for the overall health of the economy. It is also one part of the "Dow Theory," which is the idea that if either the industrial average or the transportation average moves above a previous high, the other is likely to follow.

Like O'Hara, Chantico Global's Gina Sanchez believes the group as a whole looks healthy, particularly on a valuation basis. However, she does believe that given the rapid rise this year, the index might soon take a slight breather.

"Remember the transports are coming off of 20-year high volumes in 2018, so they're going to naturally slow. … The ride isn't going to be quite as solid as the S&P on average, but it would still be very, very good. They're expected to grow at an earnings rate at about 10% growth for the rest of the year, so that's still pretty good," she concluded.

CSX hit an all-time high on Wednesday, while Kansas City Southern hit a 52-week high.

— CNBC's Elizabeth Gurdus contributed reporting.




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