CSX Corporation (CSX) beat earnings estimates after the closing bell on Wednesday, Oct. 16, and the stock is rebounding toward its semiannual pivot at $73.61. This is an attempt to reverse the negative reaction to earnings released on July 16, when the stock gapped blow this key semiannual level. This reversal has the weekly chart positive, but can the positives continue given the miss on revenue?

CSX shares closed Thursday, Oct. 17, at $69.78, up 12.3% year to date and up 19.2% since trading as low as $58.47 on Dec. 26. The stock is also in correction territory at 13.6% below its 2019 high of $80.73 set on May 3. The fundamentals are neutral, with a P/E ratio of 16.63 and dividend of 1.39%, according to Macrotrends.

The improvement in earnings compared with the release from three months ago comes as the number of employees shrinks. The railroad operates 21,000 miles of track through 23 eastern U.S. states and into Canada. On the west coast of Florida, where I live, the track near my home has just been upgraded despite limited traffic. The overall issue is that rail traffic has been declining in recent quarters.

The daily chart for CSX

Daily chart showing the share price performance of CSX Corporation (CSX)
Refinitiv XENITH

The daily chart for CSX shows that the stock was poised for a breakout to a new all-time high going into earnings released on July 16, then gapped lower on the negative reaction. The stock has been above its annual value level at $55.56 all year long.

The close of $77.37 on June 28 was an important input to my proprietary analytics. The stock plunged below its second half 2019 pivot at $73.61, which makes this level a risky level. The close of $69.27 on Sep. 30 was another input into my analytics, and the stock is well below its fourth quarter and monthly risky level for October at $79.39 and $79.84, respectively.

The weekly chart for CSX

Weekly chart showing the share price performance of CSX Corporation (CSX)
Refinitiv XENITH

The weekly chart for CSX is positive, with the stock above its five-week modified moving average at $68.95. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $52.67. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 35.50 this week, up from 30.00 on Oct. 11. At the May 1 high, this reading was 91.05, with the level above 90.00 putting the stock in an "inflating parabolic bubble," which popped following the July 16 disappointing earnings report.

Trading strategy: Buy CSX shares on weakness to the annual value level at $55.56. Reduce holdings on strength to the semiannual, monthly, and quarterly risky levels at $73.61, $79.84, and $79.39, respectively.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the close on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new monthly, quarterly, and semiannual levels. The semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sept. 30 established the level for the fourth quarter. The close on Sept. 30 also established the monthly level for October, as monthly levels change at the end of each month.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.