There is doubt assailing all businesses right now, but worst off perhaps is the cruise industry. Companies like Royal Caribbean (NYSE:RCL) are in danger of dying. Any upside thesis has a glass bottom until the outlook for a Covid-19 vaccine is real. And since there will not be any sales flowing for a big chunk of 2020, RCL stock is an extreme speculative bet.
Nevertheless, I want to stay hopeful — perhaps the world will reopen in a few months and life will go back to quasi normal this year. I had the same idea that back in April when I wrote about some upside opportunity, and a 30% rally followed. The traders among us would have surely booked it and are looking for new entries.
The opportunity now presents itself once more, since RCL retraced almost 100% of the spike.
RCL Stock Trade Is the Same — Just Rinse and Repeat
The thesis is the same now as it was before, and conviction also remains low. RCL stock showed some life, but it was for a short stint. Now the bulls need to hold support so they can remount the rally effort. There were no new developments that make the way out from this crisis any easier this time around.
I know this sounds like an argument for a bearish bet, but it is important to set the plot with the proper optics. I reiterate — be careful about not turning this trade into a bigger investment than is logical. Because it’s not a matter of when but rather if they recover.
For the traders who chased the rally late and are now stuck in a losing trade, there is some hope. Royal Caribbean gave back almost the entire rally, and usually these are support zones unless we get new incremental bad news about the outlook. The world stopped moving at the peak of the crisis, so that bottom should hold on this retest.
Find the Right Levels on the Chart
The first base of support is through $34 per share. If it fails, then there will be buyers near $30.75 per share. But if that is lost, then the bears can attempt to push it another $6 lower from there.
This is why it is important for investors to define the type of trade this is. If it is an investment for the long term, then managing these gyrations is not so important. But for faster swing trades, it is imperative to know where to set the stop loss orders.
For the sake of optimism, I will mention that if the bulls can break out from $48.50 and then $50, they would invite many more buyers. But the baby steps now include finding the base first and chipping away at the resistances going into $34 to $41 per share.
For certain segments of the leisure category like cruise and airlines stocks, headlines are very important. The government is intent on saving high-profile business, but the consensus has not settled that cruises are safe like airlines. And even those are not out of the woods — yesterday the CEO of Boeing (NYSE:BA) rekindled those fears as he said it was likely that a U.S. carrier will go out of business this year. This was an irresponsible statement from one CEO to cause harm to the devastated share holder of another.
First of all, it was not necessary because he doesn’t know any any more than what is public on the likelihood of say United Airlines (NASDAQ:UAL) ‘going out of business.’ Second, there is a difference between filing for bankruptcy and going out of business. Airlines have filed for bankruptcies many times before and they continued operations. Most modern bankruptcies mean that companies get relief from debt burdens as they reorganize. Their creditors will be left holding the proverbial bag. And I suspect that would also be the worst case scenario for cruise companies.
The Fundamentals are Still as Iffy as When the Crisis Started
Notice that I still didn’t mention the RCL stock fundamentals — because there are none. The world is still mostly under quarantine, so there are hardly any non-essential sales going on. This heavily impacts cruise stocks like Royal Caribbean. Moreover, the concern now is the very existence of this company this year. Last week management let the investors know that they are setting up for better cash positions to help whether the storm.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
