Kansas City Southern (KSU) Offers a Cautious Lesson On 'Buy' Signals

Kansas City Southern (KSU) is recent crossover of its 50-day moving average may not be as bullish as it seems

Jan 26, 2017 at 3:47 PM
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Schaeffer's Senior Quantitative Analyst Rocky White just released a list of the best indicators to use when trying to identify "buy" signals, highlighting the reliability of Bollinger Bands and 50-day simple moving average (SMA) crossovers. While these signals can be effective tools in determining a stock's future price action, it's important to base trading decisions on a variety of tools and indicators to create a fuller picture. One prime example offered by Schaeffer's Quantitative Analyst Chris Prybal is railroad stock Kansas City Southern (NYSE:KSU), which highlights why it is so important to not use one single indicator as a trade catalyst.

Looking at the charts, KSU recently crossed over its 50-day SMA, after bouncing from the round $80 level earlier this month. However, going back to 2000, the stock has averaged a five-day loss of 0.2% -- unlike these two stocks -- in the 94 other times this signal has occurred. And though the shares appear to be finding support near $83, home to a 38.2% Fibonacci retracement of their 2009 lows and 2014 highs, they have recently been charting a path of lower highs.

In fact, KSU is down 13.3% from its August highs north of $100 -- and has shed 1.8% today to trade at $87.29, after a canceled meeting between U.S. President Donald Trump and Mexican President Enrique Peña Nieto fuels worries about relations between the two countries. Specifically, KSU imports and exports goods from Mexico along its railways, and could be negatively impacted by deteriorating trade ties.

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The stock could also face increased headwinds, should the bullish tide begin to shift in the options pits. The stock's 50-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows 2.22 calls bought to open for every put over the last 10 weeks of trading, a reading that sits just 6 percentage points from an annual peak.

What's more, KSU's Schaeffer's put/call open interest ratio (SOIR) of 0.86 sits in the 36th percentile of its annual range, suggesting a near-term traders are more call-heavy than usual toward the stock. In fact, KSU's call open interest is in the 94th percentile of its annual range, with nearly 36,000 contracts outstanding. An unwinding of the hedges related to these bullish bets could amplify the political and technical trouble staring down Kansas City Southern (NYSE:KSU).

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