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It's been a tough earnings season so far for railroad stocks as company after company failed to meet analyst expectations, and many lowered their outlooks for the next quarter as well.
Some stocks were punished for their lack of performance with sharp breakdowns on their charts, while others merely stumbled. Still, the heavy weight of a faltering sector sits squarely on the shoulders of all its component stocks.
Kansas City Southern (NYSE: KSU) released worse-than-expected results before the bell on Oct. 18. After a knee-jerk rally in the premarket session, the stock moved lower, closing the day down more than 2%. While that may not seem so bad, the damage done on the charts was more significant.
It marked the second time in a week that the stock was halted at the $97 level, as technical indicators clearly signaled something was not quite right.
KSU also failed to trade up to major resistance at the $100 level, which is defined by several turning points over the past 15 months.
In technical circles, failure to trade up to resistance is a sign of weakness. It indicates sellers did not wait for higher prices to sell because they were not interested in taking that risk.
Oct. 18 also marked the second failed attempt to breach the 50-day moving average, and KSU now trades below it short-term averages (10-, 20- and 30-day) as well.
For the more technically inclined, there were bearish divergences in stochastics and money flows. The stock continues to lag the performance of the Dow Jones U.S. Railroads Index, and it appears there was a "M" formation within Bollinger Bands.
In other words, price action is telling us to be bearish in the short- and intermediate-term periods, and the indicators agree.
There is a little more work for the bears to do to trigger a longer-term sell signal, and that includes dropping below the September low of $88.86. That would put a lower high and lower low in place to make more conservative traders comfortable. It would also be a break of the 200-day moving average, but given that the 200-day is rather flat, this signal would not carry the weight it typically does.
However, given what is already in place technically and the weak fundamental news that seems to be quite pervasive in the sector, I do not see a good reason to wait.
Peer stocks have broken their 2016 trendlines, and money is flowing out of KSU, which is already underperforming its sector and the market. That is a recipe for lower prices ahead.
Recommended Trade Setup:
-- Sell KSU short at the market price
-- Set stop-loss at $95
-- Set initial price target at $77 for a potential 14% gain in 12 weeks
Any hope of an economic upswing that benefits the rail sector is just that at this point -- hope. And we'll have to wait another three months for any more surprises on the earnings front.
Earnings season provides a unique opportunity for outsized gains in a short amount of time. One of my colleagues developed an earnings algorithm that predicts whether a company will exceed or miss expectations with great accuracy. In the previous earnings season alone, he used it to make:
-- 35.1% in three days from Mosaic (NYSE: MOS)
-- 19.3% in three days from Baidu (NASDAQ: BIDU)
-- 27.3% in nine days from CVS Health (NYSE: CVS)
-- 33.3% in 23 days from TripAdvisor (NASDAQ: TRIP)
He's putting together a new batch of earnings trades for this season. Find out more here.
This week, my system pinpointed the ripest trade out of a database of 6,129 stocks — a perfect "needle in a haystack" trade.