Earnings season is now well under way, and well-defined trading setups are rearing their heads as bigger-picture topping patterns emerge.
In that vein, railroad systems operator Kansas City Southern (NYSE:KSU) reported fourth-quarter results last Friday, and KSU stock slumped as a result. Worse, that move may have triggered a bearish formation, and Kansas City Southern could be ripe for a continued selloff.
Specifically, KSU reported Q4 earnings of $1.28 per share, up from $1.03 in the year-ago period and better than the consensus estimate of $1.23. Revenues of $642.5 million also were improved, though they missed analyst expectations of $658.4 million.
On Dec. 15, I first flagged a bearish development in KSU stock as I wrote the following:
“In the immediate term, the stock increasingly looks ripe for an oversold bounce, but keeping in mind the bigger-picture chart above, any move back into the $115-$116 area would likely offer active investors and traders a better opportunity to short the stock rather than buy it for any new leg up.”
As we will see on the daily chart, the stock ended up bouncing well above the $115-$116 area but the bigger-picture bearish pattern remained intact and last week looks to have triggered.
KSU Stock Charts
On the multiyear weekly chart, we see that KSU stock still is holding its 2009 support line, which is good to use for reference purposes. The bigger takeaway from this angle, however, is that upside momentum has been deteriorating; the Relative Strength Index (RSI) at the bottom of the chart has formed a series of lower highs since spring 2013.
This deteriorating upside momentum has also led the stock to double-top last November and now looks to have enough weight to pull the stock even lower.
On the daily chart, we see that after my initial analysis on the stock’s bigger picture weakness in mid-December, Kansas City Southern bounced sharply along with the broader market, but by late December ran out of steam and marked a lower high versus its late November highs.
Then, in the first two weeks of 2015, KSU stock quickly dropped back toward its mid-December lows, and on Friday after the earnings report, it sold off to the tune of 5.2%, closing the week below the December lows and at levels not seen since last August.
Active traders and investors could now consider selling short KSU stock around the $108 area for a drop toward $97-$100, using a stop-loss near $113.
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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.
