Railroads on the Defensive Ahead of CSX Earnings

CSX Corporation (CSX) reports first quarter results after Tuesday's closing bell, with analysts expecting earnings per share of 66 cents on $2.8 billion in revenues. The railroad giant topped out and sold off in January after beating fourth quarter earnings estimates by 8 cents and matching the revenue consensus. That sell-the-news mentality could play out once again, with many funds and retail investors sitting on their hands, awaiting results of the protracted NAFTA negotiations.

Norfolk Southern Corporation (NSC) and Union Pacific Corporation (UNP) have matched their rival's mixed performance since January, stuck in holding patterns despite strong growth. A NAFTA breakdown could sharply lower freight volumes and drop these stocks into downtrends along with other transports dependent on cross-border traffic. However, negotiating parties have issued upbeat forecasts in recent weeks, raising hopes for a deal before month's end. Speculators acting on that optimism could profit from relief rallies that lift these issues to bull market highs. (For more, see: A Primer on the Railroad Sector.)

CSX Corporation (CSX) shares cleared six-year resistance in the mid-$20s in early 2014 and stalled in the upper $30s at the end of the year. The stock sold off into 2016, buffeted by a commodity collapse that threatened to trigger a recession. The stock bounced at long-term support in February 2016 and turned higher, breaking out above 2014 resistance in January 2017. The new uptrend eased into a shallow trajectory in June, generating a series of nominally higher highs into January 2018's all-time high at $60.04, posted in the opening minutes following fourth quarter earnings.

CSX stock sold off to horizontal support in the upper $40s in February and bounced into the mid-$50s, where it has been grinding sideways for the past two months. The monthly stochastics oscillator rolled into a sell cycle during the first quarter swoon, with relative weakness likely to continue into the third quarter. In turn, this suggests that smart money will sell a rally that reaches January resistance unless a NAFTA agreement triggers a major short squeeze. (See also: 3 Short Plays If NAFTA Crumbles.)

Norfolk Southern Corporation (NSC) reports earnings on April 25. The stock broke out above 2008 resistance at $75.53 in October 2013 and entered a trend advance that topped out at $117.64 in November 2014. The subsequent decline unfolded in two selling waves that ended with a climatic 34-point plunge into the February 2016 low at $64.51. The stock completed a round trip into the prior high in January 2017 and mounted resistance, dropping into a rectangle pattern that completed a long-term breakout in September. 

It added over 30 points into January 2018, posting an all-time high at $157.15 and turning sharply lower into February. The stock bounced with the broad market, but the recovery effort fizzled out, carving a lower low that failed last year's breakout. It will now take a rally above $140 to reinstate broken support and improve the deteriorating technical tone, which could happen because on-balance volume (OBV) has jumped to a new high, despite weak price action.

[Learn more about recognizing chart patterns and developing your trading strategy in Chapter 5 of the Technical Analysis course on the Investopedia Academy]

Union Pacific Corporation (UNP) reports earnings on April 25. The stock broke out above the 2008 high at $42.90 in 2010 and entered a powerful uptrend, underpinned by strong U.S. growth. The rally topped out above $120 at the end of 2014, giving way to a decline that relinquished nearly 50% of the stock's value into January 2016. That low marked a major buying opportunity, ahead of a recovery wave that reached the prior high in November 2017.

The stock broke out in December but gained just 19 points into January 2018's all-time high at $143.05. It sold off with other U.S. equities into February and bounced into a diagonal pattern that has held within narrow range boundaries for the past two months. OBV confirms steady buying interest under the surface, suggesting that it will take little effort to lift this old school railroad giant to a bull market high. (See also: How Union Pacific Is Essential to the U.S. Economy.)

The Bottom Line

Major railroads have pulled back from January highs, with smart money keeping powder dry while awaiting the outcome of NAFTA negotiations. (For additional reading, check out: Top 4 Railroad Stocks for 2018.)

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