Stock Of The Day: Is The Carnival Rally Over Already?

Carnival Corporation & plc (NYSE:CCL) shares are trading a little lower on Tuesday after surging more than 8% on Monday. Some analysts attribute the move to comments from Royal Caribbean Cruises Ltd. (NYSE:RCL) about industry strength, but the rally may already be over. This is why Carnival is the Stock of the Day.

One of the interesting and important dynamics of financial markets is how some price levels carry more weight than others. Sometimes the reason why may be obvious.

For example, people like to place buy and sell orders at round price levels, like $20 or $100. This gives these levels psychological importance.

But sometimes the reason is not initially clear.

In August, Carnival ran into resistance around $32.50. It then reversed and headed lower. It isn't clear why the sellers flooded the market around this price, but when the shares reversed, it made this level important.

When the stock returned to $32.50 in September, it became resistance again. This happened because people who bought in August around the peak and had been underwater since used the opportunity to get out at breakeven.

This selling created resistance at the level again.

As you can see on the chart below, $32.50 has been a well-defined resistance six times. It isn't clear why the trend reversed around this level in August, but when it did, it made the level important, and it has been so since then.

Now that Carnival is back to this important level, traders are watching closely. The last five times it reached it, impatient, anxious sellers overpowered the sellers and pushed the shares lower.

But if the stock can trade through and hold above $32.50, traders will say it is a ‘breakout'. This could have bullish implications for the stock. It would show that the sellers who created the resistance have finally left the market.

This could set the stage for a move higher in Carnival, as buyers will need to outbid one another to draw sellers back in.

Image: Shutterstock