WJA, Westjet and AC, Air Canada

wja july 29 2015 bwja july 29 2015 s

There is very little in this chart that is clear. However it would appear that the last leg up is one of those diagonals or wedges. The are always in either 5th wave or wave positions. The immediate expectation then is for a drop to the base of that pattern which, at around $19, is not that far away. When using EW you do not have to get it all, as long as you have one pattern that is recognizable without a doubt you can sort of construct the whole picture. It helps in those circumstances to get confirmation from another stock that is in a similar business etc.etc. Air Canada fits that bill:

ac july 29 2015 bac july 29 2015 s

The timeframes are not the same but at least here you see that the diagonal or wedge is as perfect as it can get. This implies that we are at a fairly major top and that there is still considerable downside, at least for AC, ahead.

Airlines do not own the infrastructure they operate in. They do not own their planes as these are often leased on an operational basis so that the capital costs can be amortized by those that are in a better position to use the deduction. Sometimes they even “wet” lease the planes. Fuel costs are entirely out of their control all though , at times , hedging might be appropriate. In short you control very few of the inputs and consequently, and history shows this, it is not unusual for management to get carried away with some expansion programme that soon kills the whole thing. Life expectancy in this business is fairly short, these are speculative investments at best. AC , of course, fell some 90% as it flirted with bankruptcy as a result of the great recession. The diagonal in that case may actually be part of a B wave which would spell disaster. See also our prescient blog of June 4, 2015.