On October 12th, 2015, American Airlines stock was trading around 42.40, in an attempt to recover from a decline between 56.20 and 34.08. A sell-off of more than 20 dollars a share in such a solid stock is usually considered a buying opportunity. However, when seen through the prism of the Elliott Wave Principle, American Airlines was still looking vulnerable. So, in order to warn investors not to rush buying American shares, we published “American Airlines Still in a Bear Market?” The chart below shows why we thought the stock has plenty of room to fall.
Starting from the bottom in 2009, we recognized a five-wave impulse all the way up to 56.20 in January, 2015. According to the theory, every impulse is followed by a three-wave correction in the opposite direction. The problem was that the decline to 34.08 was looking far too small to be the entire retracement. So, we assumed it was only the first phase of it, which led us to the conclusion that more weakness should be expected, before the market finds healthy support. The next chart visualizes American Airlines stock’s development during the last 9 months.
After a closer look into the details, it turn out that a little relabeling was needed, because instead of a simple A-B-C zig-zag, American’s three-wave decline is a W-X-Y double zig-zag. However, from a trading point of view it makes little difference. Last week, the price of the stock fell to as low as 24.83 in wave Y. This is over 9 dollars a share below the bottom of wave W, so the bearish expectations the Wave principle led us to have been met.
Okay, that was a good one, but what to expect from now on? The theory says that once a correction is over, the larger trend resumes in the direction of the five-wave sequence. In American Airlines’ case, the 5-3 wave cycle seems complete and the impulse points up. The bears should slowly start realizing they do not have the power to fight the bulls anymore. If this is the correct count, American Airlines stock is likely to head north again and probably climb above the top at 56.20.
