Cathay Pacific Shares Set to Cruise Higher: Charts

Cathay Pacific's posted its best six-month profit in two years on Wednesday, sending its shares up more than 3 percent.

While it's easy to attribute the Hong Kong flagship carrier's recent stock gains to its improving earnings, a closer look at the firm's stock chart shows a broad cruising pattern that's unlikey to be significantly altered by earnings releases.

CATHAY guppy.jpg

Its stock chart shows a series of three parallel trend lines. The outer trend lines define the oscillation from the underlying trend shown by trend line B. It's worth noting that this is not an Andrews Pitchfork pattern where the outer trend lines are defined by a defined standard deviation ratio. In this situation there is a consistent rally and retreat oscillation around the central trend line.

Starting with the rebound from the classic double bottom trend change pattern, trend line B has defined long term uptrend directopm. It acted as a support level. The rally and retreat behaviour above this trend line is bounded by trend line A. This trend line provided a resistance barrier. It is not an exact level, but it broadly contained price activity in this rising trend channel.

Cathay is a stock of our times and reflects a common offset trend behaviour. When the price reached historical resistance near HK$14.50, the momentum disappeared from the trend. In other charts, this will sometimes result in a prolonged sideways pattern. But with Cathay, it was a fast retreat and a move below the long term up trend line. This break in trend line support changes the nature of the trend, and the role played by the long term trend line.

Trend line B now acts as a resistance level, capping any rally rises. The rebound point near KH$12.50 is used as an anchor point for trend line C. Trend line C is a tentative line and the position has not yet be validated by a second retreat and a rebound. This parallel trend line potentially defines the new rising trend continuation. Trend line B acts as a resistance level so traders look for a earnings retreat away from this line and a retest of the value of trend line C, currently near HK$13.50.

An unexpected good earnings report has the capacity to drive Cathay above trend line B and towards the value of trend line A. However, the higher probability is that prices will remain inside the lower trading channel between trend line C and trend line B.

The dominant feature on the chart is the area of turbulence near HK$14.50 at the long term historical support and resistance level. Turbulence is shown with price clustering in this area with relatively low volatility constrained by the interaction of trend line B and C, and the historical resistance level. This turbulence area will need to be cleared before smoother uptrend activity is resumed.

A successful sustained move above HK$14.50 uses the value of trend line B as a resistance level until the trend encounters the next historical support resistance level near HK$17.00. When an offset trend channel develops there is a high probability price will continue in the lower trading channel for an extended period.

Cathay can expect some turbulence and a retest of the support from trend line C but this uptrend is settling into a new cruising pattern.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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