Just when the Dow Jones Transportation Average was poised to catchup with industrials, CSX (CSX) missed earnings estimates causing the stock to derail on Wednesday, July 17. More importantly, the railroad cut its full-year guidance, which questions the strength of the U.S. economy.
Here’s a look at the daily chart for the iShares Transportation Average ETF (IYT), which seeks to track the investment results of the Dow Jones Transportation Average Index.
Note how IYT spiked higher on Tuesday to $195.65. This put the ETF between its semiannual and annual pivots at $193.47 and $196.35, which is the first range within which profits should be taken. Today the ETF is just above its monthly value level at $186.61 where traders can buy on weakness. Beware that the weekly chart will be downgraded to neutral given a close on Friday below its five-week modified moving average at $187.90.
CSX is a component of the iShares Transportation Average ETF. CSX provides freight railroad services of intermodal containers and trailers for bulk commodity companies such as the energy producers. The stock has an elevated P/E ratio of 19.12 and offers a dividend yield of just 1.21%.
The daily chart for CSX
The daily chart for CSX shows that the stock was poised for a breakout to a new all-time high moving above the high of $80.73 set on May 1. Then came the negative reaction to earnings and a breakdown versus new key levels. The close of $77.37 on June 28 was an important input to my proprietary analytics. The annual value level remains at $55.56. The stock plunged below its third quarter pivot at $77.55, its July monthly pivot at $77.09 and its second half 2019 pivot at $73.61, which are now risky levels.
The weekly chart for CSX
The weekly chart for CSX will be downgraded to negative given a close on Friday below its five-week modified moving average at $76.37. The stock is well above its 200-week simple moving average or “reversion to the mean” at $50.04. The 12x3x3 weekly slow stochastic reading is projected to decline to 59.60 this week, down from 64.04 on July 12. At the May 1 high this reading was 91.05–which is above 90.00–putting the stock in an “inflating parabolic bubble,” which popped this week.
Trading Strategy: Buy weakness to the annual value level at $55.56. Reduce holdings on strength to the semiannual, monthly and quarterly risky levels at $73.61, $77.09 and $77.55, respectively.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on December 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, the latest on June 28. The quarterly level was changed at the end of June. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years. The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an inflating parabolic bubble as a bubble always pops. I also call a reading below 10.00 as being “too cheap to ignore.”
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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