Kansas City Southern (NYSE:KSU) shares came under renewed pressure last week, and the railroad company plumbed fresh 52-week lows on a closing basis. The transportation stocks as a group have displayed both relative and absolute weakness as of late; KSU stock played a pronounced role in all this.
That said, KSU stock looks increasingly oversold and ripe for a high-probability bounce that could take short sellers by surprise.
The transportation stocks as a group lost about 2% last week after topping out last November and feeling heavy for all of 2015. The trend indeed looks lower through a multimonth lens but near-term bearish sentiment as measured by my Twitter stream is tipping into the red as media coverage of this has exploded in recent days and weeks. If markets want to take the path of maximum frustration for investors, as they often do, then this is a good spot for transportation stocks to bounce for a bit.
KSU Stock Charts
Getting right to the long-term weekly chart of KSU stock, we see that the selloff during the month of May, which also saw a host of brokers downgrade the stock or at least lower their price targets, resulted in the stock breaking its 2009 uptrend line for the first time.
Note that the stock’s highs in November 2013 and November 2014 shaped a double-top formation, and also note that the year-to-date selling so far has clipped the stock by about 25%. Furthermore, the Relative Strength Index (blue line) at the bottom of the chart has now reached extremes last seen at the 2009 and 2014 lows.
Going all contrarian on you, I also will point out that the break of the 2009 support line is arguably too obvious of a move for the stock to follow lower in a straight line. After all, the crowd likely has sold plenty of shares on the back of this break, and some quicker traders probably have even gone short. Thus, I see little selling power left in KSU stock.
On the daily chart, we see that last week’s plunge in KSU stock has bumped it into its early 2014 lows and also led the stock to be notably extended below its 200-day simple moving average (red line) as well as its 50-day SMA (yellow line).
There is no reason to overcomplicate this trade here. Active investors could look to buy the next bullish reversal day that either further exhausts the stock into the high $80s or sends it back above the $92.50 area. This could then set up a bounce into the high $90s.
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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.
