Coronavirus Rattles Airline Sector. What Does Elliot Wave Analysis Indicate?
EWM Interactive | Mar 17, 2020 08:15AM ET
As the coronavirus pandemic rages on, governments are taking measures to restrict unnecessary travel and mass gatherings. The airlines sector is probably the one being hit the hardest by the restrictions. The high fixed costs and huge debt loads of the airlines make them extremely vulnerable to economic downturns. With international and domestic travel on the verge of grinding to a halt, bankruptcies seem a real possibility.
As a result of this dire situation, airline stocks plunged sharply across the board, losing 30-70% YTD. And while prospects for the industry appear bleak at best now, there was a time when airline stocks looked very attractive.
h2 Avoiding Buffett’s Airline Nightmare/h2Over three years ago, Warren Buffett disclosed a significant stake in the four US airline majors. Shortly after, in mid-December 2016, we published the following charts of two airline indices in an article titled “Mere Mortals Should Leave Airlines to Buffett.”
The US Airline Index (DSAR) and the Airline Index NY (XAL) had been rising in the years after the Financial crisis. The structure of that recovery, however, looked like an almost complete five-wave impulse. According to the Elliott Wave principle, a three-wave correction follows every impulse.
This simple rule led us to conclude that “once the fifth waves in both indices end, a significant decline to the support area of wave 4 should follow.” In addition, both charts revealed a strong bearish RSI divergence between waves 3 and 5. So instead of joining probably the greatest investor of all time, we decided to observe from a safe distance. Now, three years and one coronavirus pandemic later, take a look at the updated charts below.
DSAR, now named DJUSAR, and XAL reached their peaks in January 2018 at 313.5 and 124.4, respectively. As of this writing, the two airline indices are down by 52% and 59% from their respective wave 5 tops. The A-B-C zigzag corrections dragged their indices much lower than the support of wave 4.
h2 Is Wall Street Wrong Again about the Airlines?/h2
Get The News You Want
Obviously no-one could’ve known that a global coronavirus outbreak is going to rattle the airline sector in 2020. But the almighty market, through the Elliott Wave patterns it forms, somehow sensed the tough times ahead over three years in advance.
Airlines looked like a great investment until January 2018, but in reality they were not. Now, they look like a terrible investment, but are they? The recent plunge served its purpose and completed the 5-3 wave cycle from the low in March 2009. This means the larger trend can now be expected to resume in the direction of the impulse pattern.
The habit of the market is to anticipate, not to follow. Even if things do get worse from here and some airline companies turn belly-up, the situation for the sector is eventually going to improve. At least that is what the charts of the two airline indices are telling us right now. Let’s see what happens…
Original Post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.