The D.J. Transportation Average has been firing on all cylinders since the presidential election, lifting vertically into a test of the 2015 bull market high. The railroad sub-sector has driven a fair share of the advance, in a bullish reaction to an expected uptick in manufacturing and industrial activity under the Trump administration. It’s also benefiting from the recent surge in crude oil prices, which could wake the U.S. shale industry out of its long slumber.
Key component Union Pacific Corp. (UNP) holds an $85.2-billion market capitalization, but the DJTA’s price-weighting methodology lifts Norfolk Southern Corp. (NSC) into the most influential position despite it’s much smaller $32-billion market cap. Together, they occupy the third and fourth slots, giving the railroad sub-sector an outsized influence on broad trends in the transportation sector.
Union Pacific bounced strongly after bottoming out at a 3-year low in the mid-teens during the 2008 economic collapse, returning to the 2008 high at $42.90 in 2010 and breaking out in a powerful uptrend. A 16-point decline during the 2011 fiscal cliff crisis marked the deepest pullback during the advance, which continued into February 2015 all-time high at $124.52.
The stock turned sharply lower in April 2015, entering in a multi-wave correction that came to rest at the 50% rally retracement in the mid-60s in January 2016. The subsequent recovery wave has unfolded at the same trajectory as the prior downtrend, with the stock just now reaching major resistance at the .618 retracement of the 11-month decline. This level has roughly aligned with round number 100, which also marks psychological resistance.
On Balance Volume (OBV) dropped sharply throughout 2015, indicating that funds were closing out positions in favor of other opportunities. It bottomed with price in the first quarter of this year but has lagged badly during the recovery attempt, regaining less than 30% of the decline. This signals a bearish divergence that lowers odds for a quick rally back to the 2015 high.
Norfolk Southern plunged from a July 2008 high at $75.53 to a bear market low at $28.64 and turned sharply higher in March 2009, returning to the prior high just ahead of the notorious May 2011 flash crash. That event stalled the recovery effort for more than two years, generating a choppy sideways pattern with support in the mid-50s. It finally completed the correction in October 2013, breaking out in a strong uptrend that continued into the November 2014 all-time high at $117.64.
The stock ground out the last leg of a head and shoulders topping pattern and broke down in May 2015, entering a downtrend that featured a violent November short squeeze. That impulse lifted price more than 20-points in three weeks but failed into year’s end, generating a final plunge to a 3-year low at $64.51. The subsequent bounce reached the November squeeze high in October, giving way to a minor pullback, followed by a post-election breakout that’s hit a 17-month high.
The rally has also reached resistance at the .786 selloff retracement level, which is likely to trigger a reversal and test at new support located just below 100. This issue has attracted much stronger accumulation than its rival since the first quarter, confirmed by OBV lifting all the way back to the 2014 high. This signals a bullish divergence that predicts an eventual trend advance above $120.
The Bottom Line
Norfolk Southern has gained more ground than Union Pacific in 2016 while attracting much stronger institutional buying interest. This relative strength should continue into 2017, making NSC a better buy than UNP. However, harmonic resistance is likely to trigger a reversal at or below $106, offering a lower risk entry when the decline tests new support near $100.
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