Institutions Ride the Rails

The general market continues to try to find its footing as the bulls and bears continue the fight to have their way. Volatility continued to grow throughout last week as the low-volume bounce ended Monday in the S&P 500 and then went into a 2% selloff the next day. At that point, it clearly looked like we were going to pierce through the March lows and head down to the 1350 area.

Then on Wednesday, we had an interesting event happen as the market opened sharply lower in the morning, breaking March lows, and then reversed to close above that support. This is technically called a key reversal day, and that happens when sellers capitulate and the buyers take control. It usually signals that the weak hands have been washed out and that the market will move higher over the short term. This sometimes, but not always, can mark an intermediate-term bottom.

The key evidence will appear over the next week if it is a true bottom. You should see a large percentage follow-through to the upside accompanied by heavy volume. That would likely show that the buyers have regained control. However, before that happens, the market may want to test the March lows that occurred a few days ago. If it does that on lower volume, the test may be successful. If not, we may be in for another leg down.

For the long-term health of the market, that would be a good thing to happen here. It would wash out the more resilient bulls and set us up with a much better bottom to buy off of. We haven't had a good correction to reset bases in the market for a while, and now would be a good time to get that out of the way.

Another interesting bit of action took place on Friday before the close. The rails made a sharp move higher on heavy volume. This was a sure sign that institutions were trying to get on large positions before the market closed. You can see from the chart below the railroad sector moved up almost 2% on a very large volume increase.

Source: TC2000

CSX Corp. (CSX - commentary - Cramer's Take) was one of the strongest movers of the day, rising over 6% on heavy volume. The stock also broke above the $38 resistance level and now looks like it will test the $41-$42 area. If it can break to those levels, we may see a new leg up into all-time highs. In order for this pattern to stay constructive, CSX will need to hold above $37.

Burlington Northern Santa Fe (BNI - commentary - Cramer's Take) didn't do quite as well as CSX, but it did move up almost 2%. It is still hovering below the $80 resistance level, and it needs to break above there to mount an attack on the February highs. BNI has solid support at $76, and a break below that would likely turn this pattern into a head-and-shoulders top. However, the stock has a nice long-term pattern, and a test of the $85.90 high or a break to new all-time highs is a solid possibility.

Union Pacific's (UNP - commentary - Cramer's Take) technical pattern isn't as strong as those of BNI and CSX, but it still has some positive accumulation happening in the stock. On Friday it moved up 1.29% on solid volume and is well above the 50-day moving average. There's solid support at the $96 level, and it will be important for it to hold that to keep the current uptrend intact. UNP now faces two significant barriers to break through at the $102 and $105.84 levels in order to challenge new all-time highs. As long as the stock holds above the 50-day moving average, that could be a good possibility.

I don't know why the institutions suddenly jumped on the rails late Friday, but that could be a good sign for commodities. If the rails are doing well, it means that raw materials are being shipped, and the demand for commodities is still increasing. So if this move continues, we should also keep an eye on commodity stocks.

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At time of publication, Manning had no positions in the stocks mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.