Is Expedia Ready to Rebound?

Over the past few months money has rotated into the Consumer Discretionary sector (XLY) Exchange Traded Fund (ETF) at a faster rate than other sectors. In fact, since November of 2017 this sector rotation created a steep ascent in the price of XLY that garnered investors a gain of roughly +18%.

While several of XLY’s largest constituents have experienced similar or greater gains over the same time period, certain holdings have lagged.

For example, Expedia (EXPE) is displaying some significant damage to its trend from a daily perspective.

Short-term Chart

After EXPE announced that it missed its earnings estimates at the end of October 2017, EXPE proceeded to gap lower by about -16% overnight. The market immediately repriced the value of EXPE and since then the price has been attempting to find some footing.

An uptrend during the former half of 2017 brought EXPE to just below 160 in late July. Over the following three months price pulled back and began forming what appeared to be a normal, constructive base. However, some negative developments were appearing in the price action.

For instance, while EXPE printed new highs in late July at 160 its Relative Strength Index (RSI) stayed below the overbought level of 70. As I have mentioned in previous articles and commentary to clients, when a price makes a new high but a key indicator, like RSI, fails to confirm with its own higher high then we have negative divergence emerging. This sort of non-confirmation signals an internal price weakness which can lead to lower prices in the future.

Additionally, in late October before earnings were announced EXPE formed a lower high around 153. Couple this lower high with the lack of internal price strength previously identified by the RSI divergence and traders could sense a weakening trend was possible. Moreover, the 50-day Simple Moving Average (50SMA) was trending sideways which indicates that the intermediate term trend was going to be range-bound at best.

After the gap-down EXPE found support around 115-117 during November and December 2017 and has since made a series of higher highs and higher lows after emerging from its post-breakdown move. That is, after clearing 126 in January 2018 EXPE has since pulled back and, so far, successfully retested that level by printing a higher reversal point at 126. Moreover, after becoming overbought and pulling back, RSI held above its mid-range level of 50 which is typically indicative of a strong price move underway.

While currently testing resistance at its 100SMA, the next significant challenge for EXPE will be to close above its 200-day Simple Moving Average (200SMA) at 138.43. Typically, when a stock is retracing its move from below a key moving average, like the 200SMA, it will be met with sell offers at each respective moving average on its way back up.

However, given EXPE’s ability to gap-up above its 50SMA, reach an overbought level on RSI, hold a higher low, and register a strong positive trend reading on its Average Directional Movement (ADX) there could be more upside for EXPE as it repairs its price action at each level of overhead resistance on the chart.

Long-term Chart

While the monthly chart displays constructive price action since 2009 through building its series of higher highs and higher lows there are some recent developments that could indicate that EXPE may continue to lag.

For example, since making a new high in 2017 relative to the previous peak in 2015 EXPE monthly RSI and monthly Moving Average Convergence Divergence (MACD) both built negative divergences.

Accordingly, EXPE’s price internals are not confirming its recent high last year. When the divergence occurred investors should have lightened up their positions in EXPE as non-confirmation is a sign of weakness and there are plenty of other stocks displaying complementary behavior in price and price-based indicators.

Despite the negative divergence, EXPE’s RSI only pulled back into mid-range to around 50 which is constructive for the trend in place. Moreover, during 2017 the monthly RSI did become overbought with a reading over 70. However, the negative divergence that emerged between the 2015 and 2017 peaks may imply that future uptrends will lack similar strength in follow-through as price has exhibited during the last several years.

Key Points

To quote hedge fund manager Linda Bradford Raschke, “In the world of money, which is shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word – Nobody! Thus the successful trader does not base moves on what supposedly will happen but instead reacts to what does happen.”

No one could have predicted the gap-lower in EXPE with any reasonable level of confidence. However, considering the negative developments in price action before the drop astute traders and investors would have reacted by selling any long positions in EXPE and investing the proceeds into other leading names.

Ultimately, shielding yourself from any commentary, anecdotal advice, or misuse of data and making investment decisions based on price action alone is the best way to trade well.

For example, even though EXPE’s price is beginning to recover as its sector, represented by XLY, continues to build a strong uptrend and lift most constituents higher, over the long-term investors should avoid stocks playing catch-up, like EXPE, and focus on other constituents of XLY which are leading the rally and are repeatedly posting new highs.

Your capital is limited and acts as the blood flow for your trading business. It should not be tied up in recovery plays like EXPE. Instead, identifying tactical and strategic opportunities to buy the leaders in the market or a particular sector will provide better performance results over the long-term.

As always, please feel free to contact me with any comments or questions. Thanks for reading.

John