Wall Street is greatly divided on how we should respond to the novel coronavirus. On the one hand, some want to open up the world for business. On the other hand, many fear that it’s too soon. The lines are definitely blurred between medical expertise, governmental ruling, practical living and business investing. It was doctors who forced the reason to shut down the world. The main goal was to save the medical infrastructure. This forced everyone to quarantine at home and that hit hospitality and cruise stocks like Carnival Cruises (NYSE:CCL) very hard. CCL stock is now 80% off its highs.
But the recovery process for Carnival’s stock is relatively clear.
It starts with a basing process, then a higher-low trend appears. Lastly, there will be a breakout from the lower-high descending trend plaguing the stock.
So far, the selloff reaction in CCL stock makes sense and it was mandated by the authoritative actions. We may know in hindsight if shutting down every region regardless of its particular situation with Covid-19 was smart. But regardless of whether it was justified, governments around the world have no choice but to spend trillions of dollars in order to try and save us from a depression.
The Environment for CCL Stock Has Never Been Worse
If you think that the “D” word is too harsh, then let me remind you that this has never happened before. Besides, don’t take my word for it, last week ECB head Christine Legarde said that Europe was “headed into a recession of unprecedented magnitude.” A depression is not that far off from that. Analysts see dire things and that’s why governments will offer loans at -1% in Europe. That’s not a typo — they mean to pay banks to borrow money.
Likewise, the U.S. is just as scared because their opening salvo for a stimulus program was $2 trillion dollars dwarfing the $750 billion TARP program that was controversial in 2008. This is chump change now, especially if you consider the trillions that the Federal Reserve is spending.
The bottom line is that there are no experts, especially in this field and the only truths lie in the charts. The fundamentals of Carnival Cruise Lines are severely depressed. Looking at the profit-and-loss statement right now means nothing because there are no sales trickling down through it. There are only expenses, so the question now is if it will survive the shutdown or not.
So far there’s no indication of imminent disaster. Moreover, the United States government proved its propensity to save industries like what they did for the airlines, even though they might have done so reluctantly. This is perhaps a phenomenon that exists only because the U.S. is going into an election season. Maybe they learned their lessons from the Lehman incident, where they let one company fail and created a domino effect.
Carnival Stock Chart Support
The fundamental expert opinions on CCL stock vary, so I suggest that you do some homework and form your own opinion. Meanwhile, there is valuable information in Carnival’s stock chart.
It’s clear that those who bought the early dip in CCL stock mid February have found themselves in deep trouble here. The bulls were not able to hold support around $32 per share. The bearish pattern from losing the $40 neckline had strong momentum, so they overshot at the ideal target. The Covid-19 correction made a normal price pattern much worse.
For the last few weeks, and since their earnings, the stock has been trying to stabilize and establish a bottom. It had a double bounce at $8 per share and now it is 75% above that. This is constructive price action, but the bulls still face a lot of resistance at around $16 and $19 per share. Essentially, every ledge that the buyers tried to hold and failed on the way down will become resistance on the way up.
The good news is that with resistance comes opportunity. Those same tough lines I just pointed out, will also be the mini triggers for breakouts to the lines above them. Meaning, if the bulls clear $16, the rally would immediately target $19.
Similarly, above $20 per share, buyers will step in to try to reach $25, and so on. After every breakout there will be fades because nothing rallies forever, especially not a hobbled stock inside an industry like the cruise lines.
But, regardless of where the bulls will break out, the question of when is much more important.
The recovery, especially in leisure and hospitality stocks, like CCL stock will be long. The consensus is that cruise ships will be the last to recover. On the other hand, airliners have a potentially faster recovery timeline because a lot of flying is necessary. Even airline stocks took a beating on Monday after Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) disclosed its exit of its airline positions. For Buffett to do that tells us that the base case for that industry may have changed forever.
This is definitely true for cruises too.
Usually Mr. Buffet gladly buys on dips, but now he may be seeing a sustainable disadvantage. While the coronavirus impact may hamper CCL stock for a long time, my fear is that the global authorities will change the way we live our lives forever, much like they did after the tragedies of 9/11.
I think this is a different threat and it’s too soon to do that. The authorities should better enforce the adoption of strict food handling procedure to stop those breakouts rather than inconvenience seven billion humans who have been doing the right things forever.
It’s a mistake to change everyone’s lives forever, every day from now until eternity based on one market’s violation of logic and health codes. But regardless of what happens in the world more broadly, if you’re interested in investing in Carnival, now’s as good a time as any to pay extra attention to any developments in the cruise-line space.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
