With Cruise Ships Timing Matters

• Posted by Greg Harmon
• on January 18th, 2012

We all saw the horrible pictures of the Carnival Corp, $CCL, cruise ship on its side and sunken off the coast of Italy this past weekend. With many casualties we all pray for the families of the victims. Not turning the boat soon enough led to a horrible tragedy. But this is also the kind of exogenous event that can kill a traders account. Carnival stock dropped over 13% on massive volume Tuesday. Royal Caribbean Cruises, $RCL went down over 6% in sympathy also on very large volume. I do not recall reading about Royal Caribbean running into any rocks, do you? In fact isn’t this pilot error? Do we really expect every cruise ship to run into a rock now? When looking at the two companies from a ratio chart, as below, there is a great trade opportunity that has grown out of this event depending on your timing. This chart shows that the balance was shifting from Carnival

to Royal Caribbean for a couple of weeks prior to the tragedy. But it was ready to consolidate between a ratio of 1.175 and 1.20 before getting creamed Tuesday. The Relative Strength Index (RSI) of the pair is now only 24.67, making a new low, and the Moving Average Convergence Divergence (MACD) indicator is continuing to grow more negative. It is also well outside of the Bollinger bands and under the 200 day Simple Moving Average (SMA) for the first time since July. Will it run lower? This chart looks broken now with support at the gap at 106 and then 97.5-102.50 from June and July. You could certainly trade it short term with a bias lower placing a stop at a ratio above 1.11, by selling $CCL and buying a dollar equivalent amount of $RCL. Or you could make an argument for a snap back based on the downside move being over extended and trade it the opposite way. Either is likely only a short term trade. But if you back out to a broader picture looking at the weekly chart over the last 10 years you can see that there has been solid support for the ratio at range between 1.00 and 1.10 with the extreme bottom at 0.95 holding twice. A trader

with a longer timeframe might instead view that as moving back to its natural state and start to build a system to range trade the ratio. the upside potential does not look to promising, snap back or not, from this timeframe. The first trade would likely be to short it into the range. Timing might matter in trading too.

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus