Interactive Investor

Chart of the week: time to buy as bullish breakout confirmed?

14th November 2022 11:37

John Burford from interactive investor

This stock was sold mercilessly after the pandemic, then again as recession fears grew. But after a key technical move, analyst John Burford finds reason to be optimistic.

easyJet is on the runway

From the depths of the pandemic-mandated near-destruction of the airline industry, is it possible easyJet (LSE:EZJ) has not only survived but is on the verge of a Phoenix-like re-birth into a new era of travel?

On the surface, the omens are not propitious, with widespread forecasts of recession ahead – and of course the negative economic impact of this week's budget that is certain to weaken discretionary spending by UK consumers.

But demand for foreign holidays remains strong – and such breaks have almost become mandatory in the British psyche, especially when viewed from the dark days of our gloomy winters.

Given this unpromising backdrop, do the charts support a contrarian bullish outlook?

This is the chart I posted on 1 November that pointed to a potential huge upside breakout directly ahead. Remember, the shares had fallen hard from the February high of 1,560p to the recent low at 280p for a savage decline of 82%. Ouch!

Past performance is not a guide to future performance.

This wedge pattern is of classic form, with five clear sub-waves and the added bonus of a strong momentum divergence at the October fifth wave low. Very promising.

My first target was set at the previous wave 4 high around 430p. And on Friday, the market surged into that zone to help confirm the bullish breakout.

In classic technical analysis, when a five-wave down-sloping wedge terminates a long and strong downtrend, the market usually moves back to the start of the pattern. In this case, that is at the 730p region. Hmm.

In common with other major airlines, easyJet had taken on huge debts which have been looking more and more onerous as bond yields have spiked up recently. Of course, that preyed on the mind of investors earlier this year to induce heavy selling of the shares.

But with air fares moving much higher than they were pre-pandemic, cash flow is recovering sharply and that will allay some fears about the debt burden.

And now with the travel business improving post-pandemic, easyJet has become a possible takeover target for larger operations such as International Consolidated Airlines (owner of British Airways).

I see further upside but an unlikely move below the £3.40 level would make me dust off my drawing board.

John Burford is a freelance contributor and not a direct employee of interactive investor.

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