November 25, 2015
This Travel Stock is on
the Verge of a Breakdown
By Michael Kahn
When good news is followed by bad trading action, we get a rather strong signal that the trend has changed. That was the case for online travel agent Expedia (NASDAQ: EXPE) in late October.
On Oct. 29, the company reported third-quarter profits rose 13% in its first earnings release since merging with rival Orbitz Worldwide. The stock jumped to an all-time high the next day and pushed convincingly through resistance from its September and October highs. All seemed as it should be with strong technicals confirming strong fundamentals.
Although Expedia gapped up on the Oct. 30 open, it closed the day in the lower half of its daily range, leaving a rather long tail on bar charts and a potential shooting star on candlestick charts. Neither of those patterns was immediately confirmed, but the lack of upside follow-through was somewhat ominous.
Of course, nobody knew that the next day -- a Saturday -- a Russian passenger jet would be shot down over the Sinai in Egypt. Suddenly travel became more dangerous than it was already perceived to be.
However, with so much time left before anyone could take action on the stock it seemed cooler heads prevailed. Expedia managed to hold fairly steady and even pushed to a temporary new high later that week on news it was once again on the acquisition trail, this time looking to buy vacation rental site HomeAway (NASDAQ: AWAY).
But the good mood did not last, and once again the stock closed in the lower half of the day's range, suggesting a change in tone for the worse. The bears had taken over and the next day the carnage began. By the end of the week, a bearish weekly reversal bar was in place.
Momentum indicators were already showing that upside power was gone. On-balance volume set a four-month low as money started to flee. And the stock fell through short-term moving averages to give a preliminary sell signal. Clearly things had soured for EXPE in a hurry.
Expedia is not alone in this change. Hotel, cruise and other travel stocks are feeling the pressure as geopolitical events starting with the Russian plane downing and then the Nov. 13 terrorist attack in Paris are keeping customers at home. From a technical perspective, a weak stock in a weak sector makes for a more successful short side trade.
EXPE is now threatening to move below its rising trendline from October 2014 for a serious downside break. (You may notice the February dip and recovery was ignored when drawing this trendline. These are clearly outlier days and the price action touches the trendline too many times to worry about them.)
Should the breakdown happen, I would expect a drop to support at the bottom of the May-to-June trading range near $104. This is also the 50% retracement level of the October 2014 to November 2015 rally. For hardcore Fibonacci fans, the 38.2% retracement of the rally from the 2013 low is also in this area.
Recommended Trade Setup:
-- Sell EXPE short at $120 or below
-- Set stop-loss at $126
-- Set initial price target at $104 for a potential 13% gain in six weeks
Note: A 13% gain in a matter of weeks is certainly nothing to scoff at, but certain traders have made even bigger profits on falling stocks in a shorter amount of time:
-- A 33.9% profit on Keurig Green Mountain (NASDAQ: GMCR) in 56 days
-- A 40.4% profit on Yelp (NYSE: YELP) in 29 days
-- A 30.4% profit on Wynn Resorts (NASDAQ: WYNN) in nine days
-- A 40.5% profit on Dillard's (NYSE: DDS) in seven days
-- A 69% profit on Alibaba Group Holding (NYSE: BABA) in nine days
Each of these trades was recommended by a trading prodigy who was making $600,000 a year trading by the time he was 18. Click here to get his next trade risk free.
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