Last week’s central bank-induced rally pushed the S&P 500 higher by another 2% on the week and also brought some better price action back into some lagging sectors. The transportation stocks — as represented by the iShares Transportation ETF (NYSEARCA:IYT) — have been lagging the broader equity indices all year and arguably foreshadowed the August/September price weakness.
Last Thursday, Oct. 22, Union Pacific reported better-than-expected earnings per share for the third quarter but came in below analyst estimates on the top line. Revenue came in at $5.56 billion, down 10% on a year-over-year basis. What looks to have impressed investors was that earnings kept up despite overhead costs and lower revenue.
Additionally, Union Pacific’s $1.20 billion share buyback in the third quarter was taken as a vote of confidence, and as a result, UNP stock rallied 3.8% on Thursday.
UNP Stock Charts
A glance at the multiyear weekly chart of UNP stock reveals that at its August lows it bounced off its 2009 support/trend line.
In spring 2013, Union Pacific began to push above its multiyear channel (black parallels), and this trend continued into early 2015. The sharp 35% drop that ensued into the August lows was a necessity, as it mean-reverted the stock’s too-steep slope and thus allowed for a proverbial reset.
The bounce off the August lows is now pushing the stock back into the upper line of resistance (previous support), and a push above there could bode well for further strength into year’s end.
Looking at Union Pacific as a ratio versus the IYT ETF, we see that the relative strength of the stock in late September began to break above the red dotted line of resistance and now is coiling up below another defined area of resistance marked by the black dotted line.
In other words, not only are transportation stocks as a group beginning to wake up, but UNP stock is also showing relative strength versus this strengthening group.
Lastly, on the daily chart of UNP stock, we see that since the August lows it has formed a series of higher lows — once after pushing above its yellow 50-day moving average and again once overcoming its blue 100-day moving average.
Now the stock is battling with horizontal resistance as marked by the black line around the $98 mark, and a successful overthrow there could quickly lead to a push into the red 200-day moving average with further potential into the $110 – $115 area into year’s end.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.