In June, 2016, Southwest Airlines was the subject of an educational article, titled ““Elliott Wave: The Devil Is In the Details”, where we presented three different scenarios for the stock’s future, in order to demonstrate that analysts should learn to look at one chart from different perspectives and keep all of them in mind. At the time of writing, Southwest was trading near $41.70 a share. Here are two of the three possible counts we examined almost ten months ago.
According to the first chart, Southwest stock was declining in wave C of an A-B-C three-wave correction, following a five-wave impulse. The second idea suggested the post-2009 uptrend was still under construction. Wave 4 was likely developing as a triangle, after which, wave 5 to the north was supposed to lift the price of the shares to new highs.
Since there was no way to know which of the two alternatives the market was going to choose, the best option was to remain on the sidelines and have both in mind. We are in the end of March, 2017, now. The updated chart below shows which path the market took.
Southwest chose count #2. Wave “e” of the triangle formed a bottom at $35.42 in early-August 2016, when wave 5 to the upside took off. By late-February, 2017, the airline’s stock was already flirting with the $60 mark. Unfortunately, every impulse is followed by a correction in the other direction. In addition, triangles precede the last wave of the larger sequence. This means that $60 a share would probably remain out of the bulls’ reach for a while. Instead, the bears might want to use the occasion and drag the stock back down to the support of wave 4 in the $35-$30 area. The relative strength index is another reason not to invest in Southwest Airlines right now. It is making the bulls’ exhaustion visible through a bearish divergence between waves 3 and 5.
In conclusion:
- You do not always have to know what is going to happen
- You can still be prepared, though.
- $59.68 might turn out to be a major top for Southwest Airlines
The Elliott Wave Principle seems a lot more eloquent now. If this is the correct count, Southwest investors are up for a big disappointment in 2017. In fact, according to the analysis of two airline indices, chances are the entire sector is going to underperform.
