• March 10, 2018 Ethiopian Airlines new B7378 Max experienced the second hull loss after the October Lion Air crash giving cause for transportation regulators to ground the aircraft globally.

• The stock price pullback created what may be either a buying opportunity, a short selling setup, or an oversold bounce which Big Money Managers will sell into.

• To understand the effect on the stock price, we have to understand the dynamics of how aviation works.

The Aviation dynamic

There are a number of dynamics that will function interdependently.

1. The preliminary results will be released within the first couple of days of the Cockpit Voice Recorder (CVR) and Flight Data Recorder (FDR) Analysis.
2. Boeing will identify the issue, formulate an Airworthiness Directive for operators to implement and work with airlines in risk mitigation strategies, which may include mechanical procedures, software changes, or pilot training.
3. The aircraft returns to service, production and deliveries continue.

That is the simplified dynamic, which occurred after Lion Air and will most likely be followed if the cause is different.

However, if the cause is similar or from the same MCAS flight control system as Lion Air, then a second accident will have a very different dynamic. Boeing may be found negligent for not implementing more appropriate rectification measures, which may result in lawsuits by victims, and financial loss by airlines for the grounding, possibly even order cancellations and investigations by regulatory bodies. Somebody will have to be held accountable.

That is the uncertainty within the ‘Uncertainty Discount’.

There are important notes to consider in how the accident has been handled.

1. Modern aircraft utilize a Flight Data Monitoring system which sends real time aircraft system information to the company operations control centre. Ethiopian Airlines should have had some preliminary information immediately following the accident.
2. Ethiopia sent the CVR and FDR to Paris for data analysis. This is significant because the US Federal Aviation Administration (FAA) is the regulatory body which all other national regulators follow the recommendations of, and the US NTSB is widely considered the most advanced investigative body. They are not the primary investigators although they are assisting.

Money Flow Index (80 is Overbought, 20 is Oversold): 15 this is an extreme ‘Oversold’ condition and a strong BUY signal. 

On Balance Volume (OBV indicates share accumulation/distribution): There was a massive selloff in shares by institutional investors. 70M shares sold in two days followed by nearly 30M shares accumulated. 

MACD Momentum: A cross below the ‘ZERO’ is considered a ‘SELL’ signal. The move was extreme so the black line would have to curl upwards in short order to signal the Selling is over.

TARGET 1: $400

TARGET 2: $420

TECHNICAL SUPPORT 1 (downside risk): $360

TECHNICAL SUPPORT 2: $330

What does that mean at MONEYWISEHQ

Boeing has been the MoneyWiseHQ top industrial sector stock choice.

In our Technical Analysis 16/02/19 we highlighted taking profits in the $420 range, looking for a pullback to the BUY ZONE near $370 and the stock is currently right in the BUY ZONE.

Given the Uncertainty of the financial and brand perception impact on Boeing a very disciplined strategy must be adhered to.

Generally when large institutions sell, they don’t buy back so fast as this would be considered a high risk ‘Uncertainty’, so any immediate move up would reflect one of three scenarios

1. Buying Opportunity with an Oversold Bounce
2. Short Selling Setup
3. Selling into Strength by institutions

STRATEGY

1. Accumulate shares near the low risk price of $360. Maintain a disciplined STOP LOSS sell price near $355 if the trade does not materialize. If the stock drops below this price, the next level of support is $330. Re-enter the trade near $330 or a subsequent rise above $360 when Boeing announces a mitigation strategy.
2. Purchase shares incrementally as price rises. Maintain a trailing STOP LOSS near the average cost basis.

A good investor has to be aggressive to make money, but if you are not defensive, you won’t keep your money. Maintain a disciplined investing strategy.