Yesterday, CSX Corporation (NYSE:CSX) reported earnings after hours and the reaction to the report was a 6% drop overnight. Typically, CSX kicks off the earnings season for the rail companies and sets the tone for what investors should expect from its peers. The drop in CSX shares suggests that there could be weakness when the other companies report. Will the disappointment with the report signal an end to the recent run in the rails, or is this a buying opportunity?

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While that question will remain unanswered for a while, it makes sense to step back and review where the rails are in their longer term trends. In looking a the chart for CSX Corporation, the stock cleared a base in early November, but failed to gain much traction after the breakout. The stock has been trading sideways save for a breakout attempt earlier this year. That breakout failed as CSX retraced the entire move, but CSX remained above the prior base. The gap down on earnings has put CSX in a precarious position, as it is now trading near the original breakout area and at a level where it's possible that it will receive buying support. How CSX reacts to this level will likely have important ramifications for the rest of the group. (For related reading, check out Five Strategies For Surviving Tough Times.)

Source: StockCharts.com

In looking at some other rails, many appear to have similar charts to CSX. Norfolk Southern Corp. (NYSE:NSC), for instance, also cleared its base in November and has been basically trading sideways since then. It remains to be seen how the weakness in CSX impacts Norfolk, but there are a few levels to watch moving forward. The prior breakout area near $50 would be the logical place to expect support, and needs to be watched. A failure there would lead to NSC breaking back into the prior base and would be considered a negative development.

Source: StockCharts.com

Union Pacific Corp. (NSYE:UNP) also looks much like the other rails. It cleared a base in November, although that base was sloppy and volatile. It also hasn't gained much traction after the breakout, and is looking vulnerable. It was already at the 50-day moving average and will likely gap below that level. An important level to watch is near $62.50, which was a level of support through the end of 2009 and into 2010. (For more, see The Anatomy Of Trading Breakouts.)

Source: StockCharts.com

Kansas City Southern (NYSE:KSU) was one of the few rails that rallied after clearing its base in November. It has been consolidating well above the base and technically appears to be in a healthy uptrend. KSU had been retracing to its rising 20-day moving average, but with the expected weakness, it will more likely trade to its 50-day moving average. That would be a level to watch, but the prior breakout area near $29.50 is the key level to keep an eye on.

Source: StockCharts.com

Bottom Line
All these stocks remain above the recent base and have left clear levels to watch, but they are likely to remain under pressure in the near term. It's important to watch how the rails act as they approach support levels. A breakdown into the prior base would be a negative development and could signal a larger topping process. However, holding these levels could offer a buying opportunity as these stocks approach support levels. The best approach may be to wait until the dust settles, but this is a key sector to track for the overall health of the markets.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!


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

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