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A glance at the chart below of the FTSE 100 shows it has been a positive week for equities as a dearth of fresh economic data prompted investors to follow through from last weeks positive reports.

US non-farm payrolls fell by 54,000 jobs in August. The decline was much less than analysts had expected and details of the employment report pointed to further labour market expansion, boosting confidence that the economic recovery remains on track.

Concerns over Europe’s banking system resurfaced amid doubts over the thoroughness of last July’s stress-tests. Recent reports indicate the tests had underestimated some lenders exposure of potentially risky sovereign debt and a full review in October could force banks to raise further capital.

There was also a reminder of the headwinds facing the regions banks as the National Bank of Greece announced it would raise €2.8 billion from the Euro/IMF emergency loan facility to deal with its debt crisis. The yield spread between Greek 10 year government bonds and their German counterparts widened to a record 950 basis points.

Technical analysis highlights the break-out above the recent trading range and a fresh medium term high confirms the uptrend remains intact. Support could now come from previous resistance at 5400, with a ceiling seen at 5600 in the short term.
It is worth noting that despite the underlying index moving higher, the RSI has failed to reflect this and this divergence is often a key signal that momentum has been exhausted often indicating a change in direction.

In summary, it has been an encouraging week for equities as recent global economic data points towards a continued recovery rather than a double-dip recession. However, I believe that markets remain rangebound as macroeconomic uncertainty will ensure that volatility remains in the medium term.

Travel and leisure companies have been among the worst performing sectors recently and 17 UK travel companies protected by a customer protection scheme have filed for administration this year.

Holiday bookings have been hit by the economic downturn, a volcanic ash cloud that closed most of Europe’s airspace for a week in April and caused disruption in May, freezing weather in January and labour disputes that caused disruption in the airline industry.

Earlier this month Tui Travel and Thomas Cook, Europe’s largest tour operators, said that trading has been softer than expected and full year earnings are now seen at the lower end of expectations.

A related company I have been researching this week is Carnival Corporation and plc, the world’s largest cruise ship operator and one of the largest vacation companies in the world.

As can be seen from the above chart of Carnival, the shares have remained relatively resilient despite pressure in the sector, rallying over 15% since mid August. The recent strength has taken it towards resistance at 2365p and with the oscillators in overbought territory the risk/reward is skewed to the downside.

The stochastic is at the top of its recent range and appears to be rolling over intersecting the slower stochastic as it moves lower. The MACD histogram also appears to be running out of steam indicating that the recent buying momentum could be nearly exhausted.

Carnival trades on a demanding valuation of 15x earnings compared to a sector average of 10x and offers a negligible dividend of 1% versus an average 3.15% on offer in the sector. The group reports in US dollars and the recent strength of the dollar against the euro and sterling means reported revenues may suffer.

Directors have recently offloaded a sizeable portion of their holdings, with former CEO Robert Dickinson selling $1.4 million, reflecting 30% of his holding and chief operating officer Howard Frank sold $1.77 million.

Although the UK emerged from recession late last year, concerns over the slow pace of the economic recovery and tough public sector spending cuts have led many potential travelers to worry about their jobs and alter their travel budgets accordingly. I don’t believe cruise operators to be an exception and therefore feel Carnival’s resilience and demanding valuation could drop lower.

At the time of writing the share price is 2359p and near term targets are seen at 2241p, 2188p and 2116p, with a stop loss at 2466p.

This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Carnival, but client accounts may. The material in this report has come from Simply Charts and Carnival’s corporate website.