Posted on August 13, 2008 - by andrew

CSX cup-with-handle now flawed after days of heavy selling

Up until this week, CSX’s cup-with-handle base was forming quite nicely. But after this week’s heavy volume selling, the handle has now become flawed.  I would not advise buying CSX anymore.

I was bullish on CSX as it was forming a cup base. The Transportation-Rail group was ranked high in IBD’s Industry Group Rankings with several members breaking out of various patterns on strong volume. However, several of these stocks were forming v-shaped bases, which are more prone to failure. V-shaped bases form when the right-side of a pattern forms too quickly, thus failing to properly shake out weaker investors.

Rail stocks have suffered a bout of selling in recent sessions. CSX was no exception. This week’s heavy volume selling has now made its handle flawed. There are a few key characteristics of a proper handle that must be met:

• Must form in the upper half of the cup’s price range
• Must not decline more than -15% from the peak in the handle
• Must close along the lows of its daily price range
• Must have a decline in volume as the handle forms

Up until this week, CSX had met all of the aforementioned criteria. The heavy volume selling (double the daily average yesterday) breaks the rule of having a decline in volume. You want to see a decline in volume because that means that institutional investors are not selling.

I think that this surge in selling volume is a big red flag in CSX’s chart. I’ve learned over the years that its not wise to ignore these warning signs. Even though its just one of the criterias for a proper handle, heavy volume selling is a clear sign that large investors are dumping shares. If they don’t support the stock, it’s bound to fail in the long run.

If you do choose to buy CSX despite the heavy volume selling in its handle, proceed with caution. Stay true to cutting losses short at -8%. I have personally taken CSX off of my list of my buy candidates list.

**UPDATE**: Here’s a follow-up on CSXl’s chart