Trade of the Day: Get On the Norfolk Southern Corp. (NSC) Stock Train

This week we close out the second quarter and the first half of 2017 on the trading calendar. This has me looking at what the next group of stocks may be that receives the blessing of institutional money flow. The transportation stocks as a group represented by the iShares Dow Jones Transport. Avg. (ETF) (NYSEARCA:IYT) thus far are higher by 4.2% for the year and underperforming the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), which is up almost double that.

Looking at the charts, however, I am increasingly seeing transportation stocks such as Norfolk Southern Corp. (NYSE:NSC) looking giddy for a next leg higher.

NSC Stock Charts

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On the first chart, I plotted the IYT ETF and below it in blue is a ratio chart of the IYT versus the SPY. On the top we see that the transportation stocks over the past six months have largely traded in a sideways consolidation pattern that kept holding support at the purple-dotted line.

This line recently also coincided with the up-trend line from early 2016, thus creating an important intersection of technical support around the $160 area.

Over the past few weeks, the IYT ETF has pushed back higher toward the upper end of this consolidation range and increasingly looks ripe to break higher. In relative terms, we see at the bottom of the chart that the transports are already showing a marginal relative strength breakout versus the SPY ETF.

A simple and effective way to find strong-performing stocks in any given sector is to look for stocks that have a similar chart pattern to that of its respective sector ETF — assuming the ETF has a bullish pattern to it. Shares of railway company Norfolk Southern currently exhibit a bullish pattern similar to that of the IYT ETF.

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On the multiyear weekly chart, we see that although NSC stock has traveled a long way over the past year and a half, there remains plenty of upside potential (10%-15% or more) until it reaches the very upper end of its long-term up-trending channel.

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On the daily chart, we see that the up-trend off the early 2016 lows also remains well intact and that the most recent three-week pause in NSC stock has merely mean-reverted it back to this support line.

Considering all of the above analysis I am keen to pronounce this pullback of late a bullish flag formation (pink-dotted lines) that ultimately stands a good chance of resolving higher toward the high $120s or low $130s as a next upside target.

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