Expeditors International of Washington (EXPD) broke strongly to the upside out of a multi-day trading channel on Monday morning, after an upgrade by RBC Capital from Underperform to Outperform just a day before the company's quarterly earnings report. RBC noted that it expects Expeditors' earnings growth to accelerate and raised its price target from $40 to $50.
The stock had closed at $41.59 on Friday and gapped higher by 2.2% to open at $42.50 on Monday morning. The stock struggled to hold those gains and sold off throughout most of the session, eventually retesting the upper limits of the daily trading channel from which it had been attempting to break free. But I'm optimistic on Expeditors' longer-term outlook.
Expeditors spent more than a decade in a steady bull market throughout the 1990s and into 2006. It experienced its greatest point gain between mid-2005 and early 2006, when it jumped from a year-long zone of congestion at $25 to a high of $58.32. Since then, however, the company has been in corrective mode. By 2009 it had retraced back to that 2005 congestion zone, establishing the lows of the correction. A second test of highs followed in 2010, but the "V"-shaped bottom meant strong resistance at those prior highs, and a second pullback followed into late 2012.
This is where Expeditors catches my eye. The second correction off highs on the monthly time frame has been more gradual than the first. It has also had lighter volume. Both of these traits indicate diminished bearish sentiment. The 2011-2012 pullback also had two primary waves of selling on the weekly to monthly time frame. I've marked these as "A" and "B" on the chart above. Typically, this is all that is needed to once again turn around that second major pullback and get the bulls back on track.
Nevertheless, that second correction did have some traits that should cause the bulls some concern. The most notable one is a result of how the second pullback off monthly highs unfolded. The pace of the selling within this second correction, while slower than in 2008, was still stronger than average. In such cases, a correction that pulls into the 76.4% Fibonacci retracement zone is typically better than one that corrects only 61.8%, which is the zone that Expeditors has held. When a correction into 76.4% takes place, the prior highs once again serve as resistance, but it becomes easier to congest at those highs and then break through them.
When a security corrects less than 50%, those prior highs are often only minor resistance, and a security is more likely to only pause at those levels before breaking through to new highs. That zone between a 50% and 76.4% correction, however, is murky territory. It creates an ascending triangle whereby the security will have a more difficult time establishing a true break of the prior highs if it goes on to retest it, and any new high can create a bull trap instead of a true breakout. It can then pull back into the range of the triangle before either trying again to break those prior highs or continue to reverse and fail the bulls completely. Expeditors found itself in this murky zone at the end of 2012 and into 2013.
Given the development in Expeditors over the past five years, I believe that the stock will at the very least attempt to retest the zone of its prior highs, making RBC's $50 target a valid one from a technical standpoint. In fact, I would place my own target closer to $52, which would be a 100% expansion of the 2013 rally. The current price development on the weekly to monthly time frames is what I call a "headless" or "decapitated" inverse head-and-shoulders pattern. Instead of a head, the pattern has a double bottom where the head would typically be. This is shown in blue on the weekly chart below. The outcome, however, tends to be the same as a normal head-and-shoulders pattern.
The time development for the current decapitated inverse head-and-shoulders pattern suggests that Expeditors may not be quite ready for a breakout on the weekly time frame. Typically, the right shoulder will develop for a similar length of time as the left shoulder for a strong breakout. This means that several more months of congestion may still be in the future. This makes sense, considering the late-day selloff Monday afternoon.
As such, I currently view Expeditors International of Washington to be worthy of accumulation at current levels, but buyers must beware that it may take several months before they see a decent return on their investment. In the meantime, there is a small dividend of 1.43% that is paid semi-annually, and today's premarket earnings report will likely shake things up as well, offering the potential for day-traders to turn part of a short-term position into a longer-term hold if this morning's report is well received.