by Serge Berger | April 15, 2014 8:08 am
Airline stocks such as Delta Air Lines (DAL) and Southwest (LUV) have enjoyed a number of significant rallies in the past couple years, but just as a number of analysts began to get even more bullish earlier this year, the stocks exhausted themselves and slowly began to correct.
It often goes like this — when a trend becomes so apparent that everyone thinks to hop on, it’s often too late.
Airlines belong to the consumer discretionary sector, meaning that they are cyclically exposed, so the slowing acceleration of U.S. economic growth has also led investors to pare down their exposure to airlines and other cyclicals.
Lastly, airline stocks are sensitive to oil prices, and given that oil has risen 6% year-to-date (and more like 14% off its January lows) … well, it’s again understandable that airlines would’ve felt this.
So, all of this has led to a selloff in American Airlines (AAL), LUV and DAL stock … and just like some stocks have seen more pain than others, some have recently reached more technically significant areas of support than others.
Delta Air Lines, which rallied 470% from summer 2011 into its recent early April 2014 top, developed a particularly steep slope that is probably unsustainable.
But because calling tops and bottoms is a loser’s game over time, for my part I like to see a stock with too steep a slope snap at least one important medium-term trendline or moving average before considering a stock ripe for a better mean-reversion move (lower).
On the below multiyear chart of DAL stock, note that shares haven’t touched their 200-day simple moving average (red line) since late 2012, which is to say that it’s likely overdue for a retest.
On the daily chart, we see that Delta Air Lines’ 12% move (on a daily closing basis) off its recent highs has merely moved DAL stock back down to the bottom of its uptrending channel (black parallels), which also coincides with the 100-day SMA (blue line).
For me to consider shorting DAL stock, it will have to break this support zone, which then would likely get more investors a little nervous and compel them to take profits.
Delta Air Lines is scheduled to report earnings in one week on April 23, which is likely the date when DAL stock either will confirm good support at the aforementioned level or break below there, which would open it up for a selloff toward the $27-$28 area (the 200-day MA).
During earnings season, it is imperative to have a list of stocks to watch with technical areas of interest mapped out, just like I did in this analysis of DAL stock here. This type of analysis and preparation helps immensely in executing trades once any given company has reported earnings.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
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