Trade of the Day: Norfolk Southern Stock Is on the Verge…

The all-important transportation stocks are up nicely year-to-date, along with the broader stock market. However, if we dig a little deeper, we see some concerning signs that traders and investors would be wise to watch closely. Shares of Norfolk Southern Corporation (NYSE:NSC) stock are currently trading at a key point through the lens of technical analysis. If the broader transportation group of stocks is any indication then NSC stock could soon be a pain trade for the bulls but one to press for the bears.

Click to Enlarge
Source: Charts by TradingView

Like most things in finance, the change at the margin, or in relative terms, is what matters. To put this into perspective, I created a simple relative chart where I divided the transportation stocks by the S&P 500. On this so called ‘ratio chart’ we see that the transports have acted relatively weak in recent weeks and are in fact back toward the relative weakness lows from December 2018. Given the importance of transportation stocks, this is not the type of price action that should give the bulls the warm and fuzzies.

NSC Stock Charts

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Source: Charts by TradingView

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

Next we look at the multiyear weekly chart of NSC stock itself. Here we see that after a more than 10-year up-trend that was orderly and took place within the two purple parallels, in 2018 the stock went vertical to the upside and broke out of the trading channel.

While the bulls will argue that in December 2018 or early 2019 the stock had a successful re-test of the upper end of the channel, in my 21 years as a trader and investor I have found that ultimately such breakouts of long-standing up-trend rarely last and lead to mean-reversion back into the big picture up-trends.

Click to Enlarge
Source: Charts by TradingView

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

Lastly, on the daily chart note that the sharp January-February 2019 rally pushed NSC stock right back toward its September 2018 highs. While the stock has been constructively consolidating below simple horizontal resistance (black horizontal), which still could ultimately lead to another leg higher, the broader relative weakness in transports must not be forgotten.

While one day does not make a trend, on Tuesday many transportation stocks, including NSC stock, had so-called bearish reversals. For NSC stock I would like to see one more follow-through selling day that pushes the stock below $177 before legging into any short trades. If and when that happens the next downside target becomes $171 while a stop loss can be placed at $183.

This trade in NSC stock also sets up well for an income trade.

On Thursday, I am holding a special webinar for InvestorPlace readers to teach this strategy in detail. Register HERE for this free webinar.

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