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Mere Mortals Should Leave Airlines to Buffett

Do not get us wrong, this is not a critique of Warren Buffett’s judgement. Who are we to criticize him, after all. In November, Berkshire Hathaway’s SEC filings revealed that the company has opened positions in four major U.S. airlines – American Airlines, United Continental Holdings, Delta Air Lines and Southwest Airlines. However, in our opinion, investors should not blindly follow anyone, not even the greatest investor of all time. Buffett is the ultimate long-term investor. Among other things, he is famous for saying that his “favorite holding period is forever”. So, if you are not ready to follow this mantra, you should not be copying him. For example, Buffett is not worried if a major market correction is going to occur. Unfortunately, for mere mortals like us, holding a stock through a bear market could be a problem. And if the Elliott Wave analysis of the two airline indices shown below is correct, holding airline stocks is not a very good idea right now.
As visible, the monthly charts of the U.S. Airlines Index(DSAR) and the Airline Index NY(XAL) look strikingly similar. Both of them bottomed out in March, 2009. Both have been rising ever since. And both have been drawing a five-wave impulse to the north during the last 8 years, which is precisely why you might be better off without airline stocks in your portfolio. According to the Wave Principle, every impulse is followed by a three-wave correction in the opposite direction. This means that once the fifth waves in both indices end, a significant decline to the support area of wave 4 should follow. In terms of price, this translates into 170 for DSAR and 70 for XAL. The relative strength index also supports the negative outlook by showing a bearish divergence between waves 3 and 5 on both charts.
Turns out, airline indices might lose 30%-40% from now on. If you are not planning to own such stocks forever, why own them now?

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