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Riding Along With Canadian Railways

11/10/11 08:35:16 AM
by Koos van der Merwe

With the indexes falling out of bed as Italy joins Greece in the European uncertainty, it is always gratifying to find a stock going against the tumbling trend.

Security:   CNR.TO
Position:   Sell

The news reports about Canadian Railways (CNR) have all been positive, and perhaps that is why the stock price is rising. Figure 1, the monthly chart, shows how the share price has risen from a low of $7.72 on March 1997 to its present price of $81.22.

Graphic provided by: AdvancedGET.
An Elliott wave count suggests that the share price has completed wave 5 and should now fall to the fourth wave of lesser degree, somewhere between $44.47 and $56.22. This is confirmed by the relative strength index (RSI), which has suggested a sell signal. Volume has been below average as wave 5 developed, suggesting weakness ahead. Concluding that a fall in price is on the cards, I looked to a daily chart (Figure 2).

Graphic provided by: AdvancedGET.
The daily chart shows the following:

1. A double bottom formed on September 22. The share price then rose to give a buy on the JM internal band indicator on September 28 in a wave 1.
2. The RSI suggested a buy signal on August 9, the first low of the double bottom.
3. The price then fell in a wave 2 to test the lower JM band but did not break it, giving a short sale.
4. The price then rose on rising volume, a sign of strength into wave 3, topping out on October 28 at $79.77. It then fell in a wave 4 on falling volume, suggesting strength. The price then rose into wave 5, but volume continued falling, suggesting further weakness ahead.

Canadian Railways is a share to watch, simply because it is not reacting to all the negativity in the stock market. The share price is suggesting a correction is on the cards, but this will just offer the opportunity to buy at a much more attractive price. I have suggested two targets, $78.14 and $73.16, both being pivot points, but neither may be the entry level. The RSI, which is overbought at the moment, may suggest a better entry level as it moves into oversold levels.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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