Big railroad stocks continue to outperform the broad market, and though this trend looks likely to continue, it’s now time to tighten stop levels and book profits on select open positions.

One of the best-performing industry groups since the October 2011 lows has been the railroads, which comes as a positive sign for the economic recovery. Though these stocks are generally considered to be defensive in nature, railroads should continue to benefit if crude oil prices stay at current high levels.

As a sector, the Dow Jones Railroads group has outperformed the Spyder Trust (SPY) by over 17% since October lows. In late October, there were three railroad stocks that I recommended buying, and though all three are up from the entry levels, stops now need to be adjusted and profits taken on one of the positions.

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Chart Analysis: The Dow Jones Railroad Index tested the 2011 highs last week at 855 (line a), which was an all-time high. The weekly close convincingly above the late- October and December highs is positive.

  • The relative performance, or RS analysis, moved sharply above its weighted moving average (WMA) in mid-October and made new highs this week
  • This is positive for the intermediate term, and long-term RS support now stands at line b
  • Volume has picked up over the past two weeks, and the on-balance volume (OBV) held above support at line c
  • The OBV is back above its weighted moving average but has not yet made new highs
  • The railroad index came close to first support at 815 on Friday’s pullback with stronger support in the 780-800 area

Norfolk Southern Corp. (NSC) is a $25.7 billion company that currently yields 2.2%. NSC slightly exceeded the 2011 highs last week when it reached $78.50.

  • The 127.2% Fibonacci retracement target and the upper parallel resistance, line d, are now in the $83.50-$84 area
  • The RS line has turned up from support, line f, and is still in a clear uptrend
  • Weekly OBV has moved above its weighted moving average but is still below its previous peak. It is well below the early-2011 highs
  • The daily OBV (not shown) is positive but does allow for a short-term pullback
  • There is next good support for NSC in the $72.80-$73.50 area

NEXT: The Strongest (and Weakest) of the Railroad Stocks

Tickers Mentioned: Tickers: NSC, UNP, CSX