The transportation sector kicks off fourth quarter earnings season with CSX Corp (CSX) on Jan.17, following a powerful post-election rally that’s lifted D.J. Transportation Average into resistance at the 2014 high. Railroad price action has been split down the middle during this period, with east-west carriers attracting buying interest while north-south carriers get sold due to fears about NAFTA repeal or renegotiation under the Trump administration.

The company drew one of the strongest industry price charts in 2016, matching the DJTA run, and is now set in a great position to break out and head into a strong trend advance. However, the majority of fourth quarter winners look overbought after their strong rallies, making it’s harder to gauge how much sidelined capital is available if results exceed expectations and a fresh buying wave sets into motion.

CSX Long-Term Chart (1993-2017)

CSX

It broke out above multiyear resistance near $3.50 (post three stock splits) in 1991 and entered an uptrend that topped out at $10.41 in 1997, at the same time the Asian Contagion infected world markets. That peak marked the top for nearly a decade, ahead of a decline that triggered a 2000 test at breakout support from the prior decade. That level held but the subsequent bounce made little progress, stalling at $7.00 and then rolling into a sideways pattern that lasted for four years.

Price action cleared the 2001 and 2002 highs in 2005 and took off in the strongest uptrend of the decade, finally exceeding the 1997 high and more than doubling into the May 2008 top at $23.56. It then joined world markets in the economic collapse, losing nearly four years of gains into the March 2009 low at $6.90. The subsequent recovery wave unfolded at the same trajectory as the prior decline, completing a 100% V-shaped retracement into the 2008 high in 2011.

The stock probed the mid-20s that year and pulled back, settling into a two-year consolidation pattern that yielded a 2013 breakout. It booked steady gains into the November 2014 all-time high at $37.99 and carved a double top into a July 2015 breakdown that gathered downside into the first quarter of 2016. It’s been on the recovery trail since that time, lifting in a steady uptrend that’s now reached within 27-cents of the bull market high.

However, the last ten years have drawn a massive rising channel (blue line) that could significantly limit gains following a breakout. Channel resistance is now situated in the low-40s, with upside limited to four to seven points before hitting that big barrier. That could be a deal breaker for the level of risk required to trade this monthly pattern while raising a red flag that may stretch across the broader railroad group.

CSX Short-Term Chart (2014-2017)

CSX

The 2016 recovery pace intensified after the stock crossed the 50% selloff retracement (red line) in September. The lack of sizable basing or consolidation patterns into the current print could add downside if earnings results trigger a sell-the-news reaction. Especially, a decline that reaches the 200-day EMA just above 30 would mark a logical target while filling gaps and shaking out excessive bullishness.

On Balance Volume (OBV) tagged a bull market high in 2014 and lost ground throughout 2015, with the distribution wave finally coming to an end in February 2016. It’s made rapid progress since that time but still hasn’t reached the prior high. However, it’s getting close enough to avoid a bearish divergence and could easily track to a new high with price in coming weeks.

The Bottom Line

CSX has recovered all of the losses incurred in 2015 and returned to resistance at the 2014 high, just in time for fourth quarter earnings results. A positive report could trigger a breakout, but limited upside into multiyear channel resistance may yield insufficient reward for some types of trend following and investment strategies.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

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