Stock to Watch: Airasia [5099]

AffinInvestment Bank has been giving a buy call on Airasia with a price target of RM3.70 (an upside of 37% from yesterday’s closing) ever since its share price was hammered from its July top due to (1) possible increase in competition from Malindo Airways, a joint venture between Malaysia’s National Aerospace and Defence Industry and Indonesia’s Lion Air which is expected to start operating in May this year, and (2) adjustment of funds as Airasia seize to become one of our index constituents. In fact, most, if not all, of the research houses have price targets that are higher than yesterday’s closing price. So given the bullishness on Airasia – which comes mainly from an increase in its number of passengers carried and its growth capacity which translates to higher revenue - and its current favorable price, should we buy now?

To answer that question, we would need to look at Airasia’s chart.

I remember around one or two months back, I mentioned in some investment forums that Airasia could be forming an inverse head-and-shoulder. The right shoulder should be at around RM2.80 or RM2.70, with RM2.70 being a better price for rebound. The RM2.70 level SHOULD be a good implicit support because that is the average price of shares acquired by Wellington Fund during the downtrend that occurred in December.

airasia inverse H&S
But with the breach of the RM2.70 support due to poor market sentiment, there is a need to re-analyze the chart. Re-looking at the chart, we can see that Airasia is forming lower highs and lower lows. By joining the highs and the lows, we can see an obvious descending broadening wedge. Based solely on this form of chart pattern, we would expect this share to continue to slide to around RM2.30 or RM2.20 before rebounding.

airasia descending broadening wedge
However, there is also a possibility that the share price will find its support at the 1-year-low of RM2.50.

airasia support

So at which price level will we see a rebound? No one knows. So the only solution is to rely on candlestick pattern to judge the likelihood of rebounding. Whenever its share price is nearing those level mentioned, watch carefully for reversal pattern such as bullish engulfing, hammer or doji at the bottom. Once those patterns occur at the support levels, the probability of it increasing would be rather high.

Of course, its share price could go lower than all the support level mentioned, or even stage a rebound at any random price. While relying on candlesticks pattern alone could help in identifying the pivot point, I strongly suggest anyone to buy only when bullish reversal patterns are FORMED AT the support level to minimize the risk. Always remember that it is OK to lose an opportunity but it is not fine to lose money.

I shall not rely much on technical indicators to predict the likelihood of reversal because of its mathematical constraints as well as its unreliability in our local market. Having said that, I welcome any additional evidence of reversal shown by any of the technical indicators as it could help boost a trader’s confidence.

Last but not least, it is equally important for a trader to know the sentiment of the market at all time as it could affect the strength of the support levels. If the market is weak on the day when price is traded around the support level, we should be wary of a possible breach of the support.

Happy reading and analyzing, and Happy Chinese New Year! =)

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