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Tickers in this Article: CSX, BNI, UNP, NSC
In April, I wrote about how railroad stocks were beginning to improve, but how they still remained in a precarious position and needed improvement before their trend could be objectively classified as anything more than a downtrend. While the rails cleared an important declining trendline, they really needed to begin setting higher highs and higher lows before the technical picture really improved.

With the current rally in the markets from the March lows beginning to get extended, it's a prudent time to revisit the rail companies to see if we can glean some important clues as to the health of the rally. Railways are an important part of the transports sector, and transports are one of the first sectors to improve following a bear market. While the economy could still be weak for some time, transports should be one of the first groups to show signs of a recovery.

In the prior article, I mentioned how there was a favorable reaction to a CSX Corporation (NYSE:CSX) earnings report, and how that could spark some interest in the group. In revisiting CSX, there have been continued improvements in the chart, with CSX trying to transition from a consolidation to a bottoming pattern. CSX was able to hold the majority of the rally off the lows, with a minimal pullback in May. The pullback in May appears to be framing the right side of an inverse head-and-shoulders bottoming pattern. CSX recently cleared the neckline of the pattern, and set a higher high in the process. This was one of the keys mentioned in the prior article, as a trend change requires new highs and lows to be formed. While one could argue that CSX has simply benefited from the existing rally, CSX has actually been outperforming the S&P 500 over the past month.
Source: StockCharts.com

Burlington Northern Santa Fe Corp. (NYSE:BNI) is another rail company with an almost identical chart setup to CSX. It cleared a declining trendline in April, as it rallied off the March lows. It matched the prior high before pulling back in mid-May, also forming an inverse head-and-shoulder base. It found support near a rising 50-day moving average and recently followed through, clearing the pattern's neckline and setting the higher high. While the coast isn't clear yet, BNI will likely also find support on a pullback to its rising 50-day moving average and prior consolidation.

Source: StockCharts.com

Union Pacific Corp. (NYSE:UNP) is an example of a rail company that set a higher high initially and then followed up with the higher low. Notice how UNP cleared the prior high on the initial rally off the March low. While it pulled back immediately following the test, it found support at a rising 50-day moving average, and successfully set the higher low. It then set a new high, while also clearing a declining 200-day moving average. The mid $50s is an important level for UNP, and any move above that area would complete a head-and-shoulders reversal pattern. (For further reading, be sure to check out Analyzing Chart Patterns: Head And Shoulders.)

Source: StockCharts.com

Norfolk
Southern Corp. (NYSE:NSC) on the other hand, is an example of a rail company that hasn't yet set a higher high or low. It has cleared a similar bottoming pattern to the other rails, but is struggling with a test of the prior high near $42 and a declining 200-day moving average. It has been flat in terms of performance versus the S&P 500.

Source: StockCharts.com

The key test for the rails will be what happens after the next pullback. Overall, the technical picture is much improved, with all the charts above showing bottoming patterns that have been cleared recently. With the intermediate time frame moving averages sloping higher, it is likely that the rails will find support on a pullback. If there is a breakdown, it will likely be on a failure to rally off the initial pullback. The right side of these head-and-shoulders bases are important areas to watch moving forward. The upcoming price action will provide important clues as to what stage of the bear market we are in. Do you think we are nearing the end of the current bear market, or are these stocks destined to fail these patterns and resume their downtrends? Let us know by participating in the Investopedia Simulator.

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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