This Transportation Stock is Flashing an Undeniable Sell Signal

The transportation sector has been lagging the broader market for the better part of the past year and a half. But truckers enjoyed a resurgence this year until mid-April, when the entire group suddenly slammed on the brakes. 

While not technically a trucking stock, Ryder System (NYSE: R), which provides truck rentals, fleet management and other transportation services, just suffered a breakdown and looks ready to follow its cousins lower. 

Ryder started 2016 off strong, retracing almost 50% of last year's sharp decline, running from a January low just above $45 to an April high just below $72. A nearly 60% gain in less than three months handily beat the market's 16% advance during that time. 

Unfortunately, last week, the stock moved below the very solid trendline that had been guiding prices higher.

R Stock Chart

For anyone watching closely, this breakdown was telegraphed by the technicals.

Momentum indicators such as Moving Average Convergence/Divergence (MACD) scored a bearish divergence and a downside crossover. 

The price highs made in April and May, while not exactly the same, were close enough to form a small double-top. And that pattern was broken to the downside on Friday at the same time as the trendline. What's more, heavy volume punctuated the break.

There are other technicals waiting to fire, too, including a short-term moving average crossover system called a "bow tie," which was developed by trader Dave Landry. When the 10-day simple moving average, 20-day exponential moving average and 30-day exponential moving average all come together and cross at the same place, it creates the shape of a bowtie on the charts. And it is a good signal that the trend has changed.

As we can see on the next chart, prices remained below the slowest average, the 30-day, at the end of last year. A positive bowtie formed in February, and prices remained above the slowest average this year -- that is until Friday. It now appears that, barring a sharp upside turnaround, a negative bowtie is just a few days away from forming.

R Stock Chart

If this happens, the 200-day moving average will also break to the downside, meaning that price and all moving averages would be in proper order for a bearish trend, i.e., price would be below the short averages, which would be below the long averages.

In short, the convergence of too many bearish technicals to ignore provides a sell signal.

It would not be a stretch to forecast a drop to $58. That level represents a 50% retracement of the recent rally. It is also near the downside measured target for the break of the rising 2016 trendline and its parallel channel line. If we drop a vertical line from any point on the upper channel line down to the lower line, we get a height of just over 9 points. Subtract that from the breakdown point at about $67.45, and we get a target just above $58. 

Recommended Trade Setup:

-- Sell R short at the market price
-- Set stop-loss at $69
-- Set initial price target at $58 for a potential 12% gain in five weeks 

Note: There's a simple way to turn this 12% move into a 42% profit while risking less than $1,200. Find out how here.

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