Technical Outlook: Be Careful on the Rails

With the continuing financial mess and its heavy coverage throughout every business day, investors can be forgiven if they aren't always able to focus on other sectors that should be watched for possible opportunities or trouble spots.

I believe it's important to not only point out investment options that may be developing in the market, but also to keep investors aware of possible topping actions in other areas.

One sector that has not been hit by the recent correction in commodity prices is the railroad industry. This group, with companies such as Burlington Northern Santa Fe (BNI Quote - Cramer on BNI - Stock Picks), Union Pacific (UNP Quote - Cramer on UNP - Stock Picks) and CSX (CSX Quote - Cramer on CSX - Stock Picks), has obviously benefited from the increased business of moving goods since the commodity bull market started.

The group has also been seen as a lower-cost way of shipping products, and with that, many of the rail companies are trading near all-time highs.

Recently, many of the stocks have been acting as if they are in a technical topping process and are experiencing increased institutional selling. Also, the earnings for many of the rails have been decelerating.

The chart below shows that the index remains in an uptrend. The price pattern of this index also replicates very closely the price pattern of many of the rail stocks. The problem I'm seeing is that every time the price reaches the top of its trading range, it's met by heavy institutional selling.

The last reversal in price, which happened in the final week of August, is building what is called a triple-top formation. That top won't be confirmed until the price breaks below the lower red timeline that I've drawn, but investors need to watch their holdings in this area very closely.

Also, the chart shows at the bottom that the institutional money stream has continued to weaken on every attempted new high. The indicator itself has put in lower highs on each rally attempt.

That tells me that the recent move in the index and most of the stocks has been met by increased selling pressure as the price has moved up. If the price does break below the lower red trendline, we will likely see a correction in the index and most of the stocks, possibly to test the January lows.

Railroads

Click here for larger image.

Source: TC2000

When I see this type of action developing in an industry or a stock, it doesn't mean that I run out and sell my entire position.

To begin, if I have some solid profits, I will take part of that off the table. Next, I will set a protective sell-stop underneath recent support areas in the event that a top does develop. That's the process of prudent money management, and in a market like this profits don't come easy. Investors need to be quick to act on situations that are beginning to look ominous.