Railroad stocks have endured mixed fortunes in 2019, with widely divergent price action exhibiting little correlation between big players. Former laggard Kansas City Southern (KSU) has lifted into leadership in this chaos, breaking out to an all-time high, while former leaders CSX Corporation (CSX) and Norfolk Southern Corporation (NSC) have slumped to multi-month lows. Union Pacific Corporation (UNP), the highest capitalized component, has split the difference with a sideways chop in the dead center of a broad trading range.

Long-term relative strength cycles predict that this divergent action will finally end in the fourth quarter, with a more constructive technical tone guiding the group's direction into 2020. CSX and NSC have the most to gain from this turnaround, which might work better as a market timing play than a long-term buy and hold, given high-stakes trade negotiations that could dictate the fate of the U.S. economy in the coming years.

Chart showing the share price performance of CSX Corporation (CSX)

CSX stock cleared 2008 resistance in the mid-$20s in 2013 and tested that level a final time in 2016, ahead of a powerful trend advance that posted a long string of new highs into the August 2018 peak at $76.24. It sold off to a six-month low in the fourth quarter and turned higher into 2019, returning to the prior high in early April. A breakout a few weeks later posted an all-time high at $80.73 in May before easing into a sideways pattern that failed the breakout in July.

The stock carved a basing pattern in the low to mid-$60s in August and turned higher earlier this month, reversing at 50- and 200-day exponential moving average (EMA) resistance above $70 about 10 days ago. This downdraft should find support at the top of the base near $67, raising the potential for a double bottom reversal that presages a trip back to the 2019 high. Even so, it's best to wait for buying signals that have yet to unfold.

Specifically, the monthly stochastics oscillator has crossed into the oversold level for just the third time this decade, but a bullish crossover may need to wait for the higher "signal" line to play catch-up, raising the odds for additional weak price action before the stock turns the corner with a sustainable bounce. The crossover should be significant when it comes, with prior instances yielding multi-year upticks.

Chart showing the share price performance of Norfolk Southern Corporation (NSC)

Norfolk Southern broke out above the 2008 high in the mid-$70s in 2013 and topped out at $117 in the fourth quarter of 2014, giving way to a steep correction that tested new support successfully in the first quarter of 2016. It returned to the prior high in 2017 and broke out once again, posting impressive returns into April 2019's all-time high at $211. A sideways pattern broke to the downside three months later, failing the breakout and dropping the stock through the 200-day EMA for the first time since January.

The sell-off into August ended at the .618 Fibonacci retracement of the rally wave into 2019 but well above the .382 retracement of the three-year uptrend. It appears that further downside is likely, with the black rising trendline going back to 2017 offering a logical turning point. A breakdown through that support level would be highly bearish, significantly lowering the odds that the stock will post another round of new highs.

The monthly stochastics oscillator crossed into a sell cycle at the overbought level in June 2019, predicting weakness into year end, and it still hasn't reached the oversold zone. However, none of the sell signals since 2016 have dropped into that extreme level, suggesting that buyers will come to the rescue in coming weeks. The black line looks perfectly positioned in this regard, telling market players to watch for a low-risk buying opportunity near $160.

The Bottom Line

Railroad stocks could bottom out in the fourth quarter and offer healthy returns into 2020.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.