Chart of the week: are bombed-out easyJet shares now a buy?

4th July 2022 12:39

by John Burford from interactive investor

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The market has satisfied all requirements for easyJet shares to stage a counter-trend rally phase. Technical analyst John Burford explains what that might mean for the share price.

As the highly negative effects of the pandemic lockdowns that grounded flights since early 2020 were easing, there was hope that the travel industry could get back on its feet. But not so. The recent well-publicised flight cancellations and airport scenes of chaos has dealt it another blow.

The shares of easyJet (LSE:EZJ) have crashed as operating losses have mounted. But have they discounted all or most of the bad news? After all, how much worse can conditions get?

This is the disaster story on the long-term monthly chart. From highs of around £18 to the current £3.70 area, they have fallen off a cliff by a staggering 80%.

So here is my bullish case:

Past performance is not a guide to future performance.

There are a couple of notable features to this chart. First, the entire decline appears to be a three down in an a-b-c. That is a corrective pattern to the main major uptrend.

Second, the 'c' wave is in a clear five-wave 'ending diagonal' pattern with overlapping waves (the wave 4 high is higher than the wave 1 low). With the new low just made in wave 5, the market has satisfied all requirements to stage a counter-trend rally phase.

Third, there is a good momentum divergence between waves 5 and 3. This indicates the selling pressure is easing into the new lows as buyers start to take control. This momentum divergence is particularly strong when viewed on the daily and weekly charts.

And fourth, the market has entered massive chart support from the 2004-2012 period. It would take a great deal of selling pressure to break below that.

Consider we are approaching the height of the holiday travel season when the industry must be pulling out all the stops to solve the well-known staffing and pilot problems to reduce the cancellation rate.

Also, aviation fuel prices seem to be easing off their highs (US gasoline prices are 18% off) and, if they fall further, that would help reduce operating costs.

So, is there light at the end of the runway? I believe so, and the shares should be at or very near a major low. My first target is around £8.50 with higher potential.

John Burford is a freelance contributor and not a direct employee of interactive investor.

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