Churn Baby Churn, Part II.

In my last post, we looked at the monthly timeframe of one of the premier stocks not just in the transportation sector, but also in the market at-large. Indeed, Canadian Pacific Railway has been on a tear since the October 2011 bottom of that particular 20% broad market correction, running from just under $45 up to nearly $120.

On Monday’s nasty broad market reversal lower, you might argue that Canadian Pacific held up very well relative to the multitude of stocks which sold off 3% or more, winding up with enormous red daily engulfing candles. While it is certainly true that CP sold off less than 1% and did not print an outside, bearish engulfing daily candle, the more subtle issue here may very well be that the stock was churning.

Of course, when I say “churning” I am not referring to excessive trading by a commission-based broker. Instead, I am pointing to the relative lack of price giveback even as volume surged. At the bottom of the daily chart below, note the uptick in sell volume on Monday. This can indicate that buyers are losing their grip on the leading stock, even as they struggle mightily to retain their stronghold on it. Churning will presage an eventual transition in power from bulls to bears.

On its face, the chart shows a clear pattern of higher highs and higher lower of an undisputed market leader for several quarters now. However, the churning on Monday (not to mention the overall market reversal) coupled with an abnormally extended longer-term angle of ascent has me looking at this as a good short setup with well-defined risk (a buy-cover stop-loss above $120, for example).

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