Southwest Airlines Stock: The Devil Is In The Details
EWM Interactive | Jun 07, 2016 02:40AM ET
Southwest Airlines Company (NYSE:LUV) stock has been in a steady uptrend since the beginning of March, 2009. Starting from as low as 4.95, prices soared to as high as 51.34 dollars a share by December 2015.
If you are familiar with what we do, you know that we rely exceptionally on price charts and pattern recognition, in order to determine the most likely development in the markets. Let’s take a look at the weekly chart of Southwest stock, which is going to show us how the whole uptrend since March 2009 looks through the prism of the Elliott Wave principle.
And here is the first controversy. The weekly chart of Southwest Airlines reveals not one, but two counts, none of which is looking less likely than the other. The first one suggests the stock has finished a five-wave impulse between March 2009 and December 2015, and is currently declining in wave C of the natural A-B-C three-wave correction, which, according to the Elliott Wave theory, follows every impulsive sequence.
So far so good, but the second count says the stock is now trading within a triangle in wave 4 and wave 5 to the upside should come next. Now, how do you pick one before the other? They say the devil is hiding in the details. Well, Elliotticians need to grow a habit of finding him.
We do it by looking at a smaller time frame chart. In this case – a daily one. It shows the internal structure of the price action in question.
If the rally from 32.36 to 51.34 was a fifth wave, it would have consisted of five sub-waves. As visible, it only has three, marked with a-b-c for wave B of the triangle, which now becomes our primary count.
Ok, but within a triangle, each wave has a three-wave structure. Then why is the assumed wave D impulsive? Because wave D is either still in progress or we simply need to switch to a third count. See it on the next chart.
Instead of a regular five-wave impulse, wave 5 could also turn out to be an ending diagonal . If this is the correct count, Southwest Airlines stock is not in wave (iii) of 5, and two new all-time highs could be expected.
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At this stage of the Elliott Wave analysis we have eliminated count #1, because wave 5 does not have the necessary structure. Counts #2 and #3 are still on the table. Fortunately, they imply almost the same consequences, so there is no need to pick a favorite.
They both suggest that the last bottom at 33.96 should not be bothered with and that at least one new high should be seen in Southwest stock.
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