While the broader market rallied off last week’s lows, transportation stocks — as represented by the iShares Transportation Average ETF (IYT) — pushed to new all-time highs. This caught my attention, particularly because this is taking place in the early part of the current earnings season.
So when Canadian Pacific Railway Limited (CP) reported earnings before Tuesday’s bell, I made it a point to closely watch the stock, even though CP stock is not an IYT holding.
Canadian Pacific earnings came in at $1.44 per share, beating estimates by 3 cents, and revenues came in at $1.51 billion to match analyst expectations. That earnings figure was a year-over-year improvement of 16%, while revenues were up just 1%.
The railway company’s Q1 results were its best for the period yet. Furthermore, the company said that despite a slow start to 2014, it remains confident in reaching its 2014 financial goals.
The news was taken well by investors, who pushed CP stock higher to the tune of 5.25% on Tuesday, bringing it right back into a technically important resistance area.
CP Stock Charts
Transportation stocks should have a leading indicator status — at least for those who believe in Dow Theory. And while the Dow Theory was based on a different make-up/weight of industries (i.e., a different economy than the one we have today), it still pays to watch the transportation stocks because strong or weak demand for physical shipping of goods still matters as a sign to the strength for the economy.
Canadian Pacific’s stock price has been trending higher nicely in recent years, holding its 200-day simple moving average (red line) as support, but last December, CP stock began to run out of steam — at least temporarily.
Through the multiyear lens, however, the pause did serve a cause: namely, to consolidate the multiyear run-up and to retest the 2011 uptrend just last week.
With yesterday’s post-earnings rally however, CP stock looks to be right back in the game for yet another push higher.
Tuesday’s rally began right out of the gate as Canadian Pacific gapped higher and never looked back. CP stock did close off the highs of the day, but not before bumping right into a thin lateral resistance area that dates back to last December.
Given the momentum of the post-earnings rally, CP now stands a good chance to be able to surpass the $155-$160 resistance area, and in coming weeks, push into the high $160s.
As always, though, any sudden reversal of the post-earnings rally needs to be taken seriously, as it would quickly erase much of the bullish posture.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
