Cruise stocks set to keep falling

Jason · June 1, 2006

NEW YORK (MarketWatch) -- What came first, the hurricane or the stock fall?

When booking a cruise that departs from Florida, everyone always suggests avoiding the hurricane season, which officially begins on June 1 and runs through Nov. 30. But the stocks of the cruise operators have no choice; they have to trade right through that period. The National Oceanic & Atmospheric Administration predicted last week that the 2006 North Atlantic hurricane season would be tamer than the record-breaking 2005, but still be "very active," with 13 to 16 named storms, including 8 to 10 hurricanes and 4 to 6 "major" hurricanes.

On the surface, so to speak, that would seem to be a pretty bad thing for cruise stocks. But if there's one thing I've learned over the years, event-driven moves don't tend to last very long. Eventually, if not by the end of the day, markets tend to return to their original trend. That could be a good thing, unless of course the original trend was down. Before any tropical storm swirls into a hurricane, and any major hurricane makes landfall, the shares of both Carnival Corp. and Royal Caribbean

RCL has already suffered long-term technical damage this year. And it would take more than clear skies in June to change that. Damage done.

The long-term technical outlook for the two cruise stocks is similarly negative, with both suffering from confirmed head-and-shoulders reversals in the weekly charts. Both stocks have also pierced their respective 200-week simple moving averages.

A "head-and-shoulders" is one of the most widely-known and most visible patterns, with three peaks, and the middle peak being the highest. The idea is that investors excited about making a new high were happy to buy on the dip, but were unable to make a new high.

For Carnival, the head-and-shoulders pattern was not a perfect one, given that it was tilted slightly and shoulders had multiple bumps on them, but the gist of what makes the pattern a reversal was intact.

The left shoulder comprises the early-April 2004 high of $46.10 and the July 2, 2004 high of $48.05, while the right shoulders includes the mid-June 2005 high of $55.75 and the mid-January 2006 all-time high of $56.14. The top of the head is the Jan. 19 high of $58.98.

The pattern was confirmed when it fell through the "neckline," which is support created by the line connecting the lows sandwiched between each shoulder and the top of the head. In Carnival's case, the neckline is the uptrend line which includes the mid-May 2004 lows of $40.05, the mid-October 2005 low of $45.78 and several weekly lows spanning mid-March to early May.

When the stock sliced through that line during the week ending May 19, it fell 13% to close at more-than 2-year low of $40.71. That sell-off was enough to push the stock below its 200-week simple moving average, which is seen by some chart watchers as a long-term bull vs. bear market barometer.

The top of the shoulders are the early-March 2004 high of $46.92 and the mid-July 2005 high of $49.47, and the top of the head is the December 2004 high of $55.47.

The "neckline" connects the May 2004 low of $37.80 and the October 2005 low of $38.59. The stock fell through the neckline, not coincidentally, during the week ending May 19, when the stock slid 9.1%. The stock closed below its 200-week SMA until the following week. See java chart.

Of the two stocks, Royal Caribbean's chart actually looks worse for one simple reason: the December 2004 high of $55.47 failed to reach the November 1999 high of $58.88, while Carnival's January 2005 high of $58.98 surpassed the April 1999 high of $53.50.

Disappointment over the inability to make a new high is what makes the "double-top" reversal pattern so poignant. Perhaps Royal Caribbean recognized this, because they moved Wednesday to shore up their finances by redeeming all of their outstanding liquid yield option notes and convertible debt due 2021, and by implementing a 4.1 million share buyback plan.

The stock was up as much as 6.7% in intraday trading, but had pulled back to trade up less than 5% by midafternoon.

The news did propel the stock back above the 200-week simple moving average, which may convince some bulls that the earlier slide through the 200-week was a "false break." But just like a hurricane slamming into the Florida shoreline does little to influence a stock's long-term trend, so does a company's last-minute attempt to shore up its finances.

A knee-jerk rally based on a company announcement is more likely to be a false move than one that has been developing over the past two years.

Citigroup analyst Elizabeth Osur said she wouldn't be surprised to see Royal Caribbean's stock give up its intraday gains when the news is fully digested, since the effect of the buyback is expected to exactly offset the shares issued to redeem the convertible debt.

Support, resistance:

Given the negative technical outlook, expect the stocks to continue lower, making stops only at key support levels. There should be buying interest for Carnival around the $33 level, which is roughly the highs seen during the three attempts to move above the 200-week between February 2001 and May 2002.

Coincidentally, that level is almost exactly where the 61.8% Fibonacci retracement level of the rally of the September 2001 low of $16.95 to the January 2005 high of $58.98. Read more about Fibonacci retracements.

If that's not enough to stop the slide, there should be support around $29, which is where the 200-week was when the stock last rallied above it in May 2003.

Below that, March 2003 low of $20.34 and the September 2001 low should draw out some buyers.

For Royal Caribbean, there should be support just above $32, which was the top of a 3-month consolidation area during the fall of 2003. The 61.8% Fibonacci retracement of the rally off the September 2001 low of $7.75 to the December 2004 high of $55.47 comes in around $26, which is just below the bottom of that consolidation range.

Below that, watch the gap in the charts between the high of the week ending July 4, 2003 ($23.53) and the low of the following week ($23.69). The 200-week just happened to cut right through that gap.

If the stock is bad enough to go through that, there could be some support at the March 2003 low of $12.42.

Resistance for both stocks should come in at the point where the necklines broke, or roughly $47 for Carnival and at about $40 for Royal Caribbean. The negativity in the stocks would be erased if they get over the tops of their respective right shoulders. Given the overhanging technical weakness, however, it would take more than a few financing moves to make that happen.

Source: Tomi Kilgore, MarketWatch: New York