Danger ahead—transport stocks a 'falling knife'

Clear skies ahead for airlines?
Clear skies ahead for airlines?   

Jim Cramer considers transportation stocks to be one of the most important groups. Investors always need to watch them, because when transports outperform, that means commerce is strong and vice versa. This one little group can give a powerful read on what's happening with the economy.

This is exactly the reason why Cramer is concerned. While the averages have been up for the past few days, transports have been performing terribly in relation to the rest of the market.

Could the transports be headed into dangerous territory?

To find out the "Mad Money" host turned to Bob Lang, a technician and founder of ExplosiveOptions.net, and colleague at TheStreet.com.

After assessing the charts, Lang thinks there could be more downside ahead. The biggest red flag in his perspective is when the Dow Jones Transportation index fell below its 200-day moving average for the first time since October.

"As far as Lang is concerned, the transports are now a falling knife. He thinks it's very dangerous to try to catch this plummeting group," Cramer added.

It could be very dangerous to try to catch the downward group, as all of the big boys are unloading these stocks at a rapid pace. Instead, Lang recommended that it would be better for investors to wait for the group to bottom and then allow it to prove itself.

Looking at the daily chart of the Dow Jones transportation index, Lang saw that the transports broke down below its long-term floor of support. This means there is nothing stopping the index from falling even lower.

To make matters worse, Lang looked at the Chaikin money flow indicator, which measures the flow of funds into and out of a stock in a one month period. The money flow indicator is now negative, which means that cash is pouring out of the Dow transports—a very bearish sign.

Additionally, Lang took the major components of the transports into consideration. First he began by looking at UPS stock, which has been heading lower since January.

Last week the chart for UPS showed the infamously bearish death cross pattern, when its short-term 50-day moving average crosses below the long-term 200-day moving average. And just like UPS and the Dow index, Lang also saw bearish signals for airlines and railroads that support his thesis.

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Thus, Cramer thinks it's time to be wary of transportation stocks. According to the charts interpreted by Lang, this key group in the market could be headed for rough days ahead.

"This very much confirms my belief that the economy is slowing here, although I don't want to be as bearish as Lang simply because I think many of these stocks are reflecting the carnage from a strong dollar," Cramer said.

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