Downside risks for Qantas

This post formed the basis of an article which then appeared in the Australian Financial Review on 24 May 2016. Michael Gable is a regular expert contributor to the AFR. You can access the AFR version HERE.

The share price of Qantas has had a dream run in the last 18 months. Back then it was trading near a dollar and was suffering the ignominy of asking the government for extra cash. Since that low point, the share price went on a charge to be sitting above $4 earlier this year. Having done that, it started to display a textbook charting pattern.

There have been a few reasons responsible for this recent rise. The company had taken measures to improve profitability such as cutting costs and backing away from its capacity war with Virgin. However, a major driver to this share price performance has been a drop in the oil price. A cheaper fuel price means better margins for airline companies as it is a major cost input.  As the stock edged towards $4, we have been warning our clients that there is a risk that it is likely to drop instead of head higher. The charts have been showing a pattern known as a “rising wedge”. This pattern can be very bearish and can indicate a peak of an uptrend. It is identified by price movements that can begin very wide but then contract as prices move higher and higher the trading range starts to narrow.

Further capacity cuts due to slowing demand and a rising oil price saw Qantas break down from this rising wedge pattern a few weeks ago. When a stock breaks down from a rising wedge, it normally heads back to where that pattern first started. This level is near $3. So although some investors may be thinking that Qantas is now a buy, the probabilities are such that there is still further to fall. Despite every other analyst still labelling Qantas a buying opportunity, we would advise to wait for it to get back towards $3. At time of writing that still represents over a 10 per cent drop from current levels.

QAN 10 May 2016

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Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168).

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