Technical analysis often gets a bad rap, and sometimes for good reason. Many analysts misunderstand its fundamental principles. However, even the simplest chart can illustrate these principles. Take Carnival Corp (CCL) for example, which is why our team of technical analysts has named it our Stock of the Day.
Charts are essentially visual representations of trader and investor sentiment. The price fluctuations that create patterns on charts are driven by these emotions. When market leadership shifts from bulls to bears or vice versa, it can manifest on a chart as a reversal pattern. These patterns, like Head and Shoulders, V, or rounded tops and bottoms, signal a potential shift in the market’s direction.
In contrast, a Flag or Pennant pattern represents a continuation pattern. A bullish flag suggests that a stock will continue its upward trajectory after a brief pause or period of consolidation. As the chart reveals, Carnival might be experiencing just such a pattern.
Sometimes, stocks become overvalued. This can lead to some buyers, who have been pushing prices higher, stepping back for a few days. They might think that by temporarily withdrawing from the market, they can allow the price to dip and then buy back their shares at a lower price. They believe their aggressive buying may have contributed to the price rise.
A characteristic of this temporary withdrawal is low trading volume. Because some of the key players are sidelined, the amount of trading significantly drops. This is precisely what a Flag pattern demonstrates. The upward trend stalls, and the share price moves sideways. Simultaneously, trading volume dries up. The Flag suggests that once these buyers return to the market, Carnival will resume its upward trend.
