The crash in crude oil continues to echo in the halls of Wall Street. Some sectors and countries like energy and Russia are cursing its demise while others, like airlines, are celebrating.
Let’s zero in on the action in airline stocks and I’ll explain why Alaska Air Group, Inc. (ALK) has one of the better charts in the sector.
In the midst of falling oil prices there is almost always a pundit somewhere harping on how lower oil should boost airline stocks. The beauty of understanding price charts and a few simple technical indicators is we can quickly check the relationship between both assets to see if such a claim is true.
Consider the chart showing the price of crude oil (gray area chart) overlayed with the NYSE ARCA Airline Index.
As shown in the bottom panel the correlation between both assets has fluctuated a fair amount over the past year. However, the majority of the time the correlation has been negative suggesting that falling oil prices are usually accompanied by rising airline stocks.
Such has been especially true over the past six weeks. At a reading of -0.78 the correlation is about as negative as it’s been all year.
Bottom line: If the negative correlation persists a continued drop in oil should benefit the airline sector and stocks like ALK.
Investors scouring airline stocks for opportunity should focus on whichever ones are providing the cleanest setups. The recent consolidation in ALK has taken on the form of a pennant and is providing one of the lowest risk entries in airlines stocks.
With the apex of the pattern looming a breakout is likely imminent, and if the existing trend is any indication the breakout will probably be higher.
Click to Enlarge
How to play ALK stock
Traders looking for a lower cost alternative to buying shares of ALK could purchase an April 55-60 call spread for $2.35. The max risk is limited to the initial $2.35 debit and will be lost if ALK sits below $55 at April expiration.
The max reward is limited to the distance between strikes minus the net debit or $2.65 and will be captured if ALK rises above $60 by expiration.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
