Carnival Corporation (NYSE:CCL) was surging over 9% on Thursday in tandem with the general markets, which saw the S&P 500 rising about 1.5%.
Despite the economy slowly reopening over the past year, stocks in the travel sector have largely failed to reap gains, and Carnival has plunged about 60% since June 8, 2021, when the stock hit a 52-week high of $31.52.
Since April 21, Carnival has been trading in a steep and consistent downtrend, plummeting about 43% to reach a 52-week low of $11.56 on Tuesday. The stock tested the area as support again on Wednesday, which formed a double bottom pattern on the daily chart and on Thursday, Carnival was reacting to that formation.
A double bottom pattern is a reversal indicator that shows a stock has dropped to a key support level, rebounded, back tested the level as support and is likely to rebound again. It is possible the stock may retest the level as support again creating a triple bottom or even quadruple bottom pattern.
The formation is always identified after a security has dropped in price and is at the bottom of a downtrend whereas a bearish double top pattern is always found in an uptrend. A spike in volume confirms the double bottom pattern was recognized and subsequent increasing volume may indicate the stock will reverse into an uptrend.
- Aggressive bullish traders may choose to take a position when the stock’s volume spikes after the second retest of the support level. Conservative bullish traders may wait to take a position when the stock’s share price has surpassed the level of the initial rebound (the high before the second bounce from the support level).
- Bearish traders may choose to open a short position if the stock rejects at the level of the first rebound or if the stock falls beneath the key support level it created the double bottom pattern at.
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The Carnival Chart: For technical traders, the double bottom pattern indicated Carnival was likely to trade up higher on Thursday, paired with Carnival closing the trading day near its high-of-day on Wednesday. Carnival’s relative strength index (RSI) had already fallen into oversold territory, which also signaled that the stock was likely to reverse course to the upside.
- Despite the surge higher, Carnival is trading in a downtrend, with the most recent lower high printed at $14.96 on May 17 and the most recent lower low formed at the low-of-day on Tuesday. In order for Carnival to reverse course into an uptrend, the stock will need to either soar up above the $15 level or consolidate lower to print a higher low.
- Carnival is likely to trader up higher in the near-term because there is bullish divergence on the daily chart, which will eventually need to correct. Bullish divergence occurs when a stock makes a series of lower lows while the RSI makes a series of higher lows.
- If Carnival closes the trading day near its high-of-day price, the stock will print a bullish kicked candlestick, which could indicate higher prices will come on Friday. Ideally, bullish traders would like to see Carnival close the trading session above the eight-day exponential moving average.
- Bearish traders will want to watch for Carnival to eventually print a reversal candlestick, such as a doji or hanging man candlestick, to indicate that at least the temporary top is in and the stock will retrace lower.
- Carnival has resistance above at $14.23 and $16.38 and support below at $12.11 and the 52-week low.
