Shares of United Continental Holdings Inc (NYSE:UAL) dropped Tuesday along with the rest of the weakened broader markets, and while UAL stock still looks constructive through a longer-term lens, it feels more at risk of a near-term mean-reversion move lower.
Active investors and traders can use the well-defined technical support level in UAL stock to play it on the short side, and/or wait for a better wash-out move to get back in on the long side.
Airline stocks have enjoyed nice rallies since last summer, arguably aided by the severe drop in oil prices. The rampant U.S. dollar rally as of late was one reason why the price of oil hasn’t seen any better bounces, and there’s the risk for airline stocks in the near-term: Once the dollar settles into a consolidation phase (trending lower), commodities including oil could see a bounce, which in turn could weigh on airline stocks.
When United Continental reported mixed fourth-quarter results on Jan. 22, UAL received one final boost that pushed it to fresh all-time highs. Although the company missed analyst estimates and the passenger load factor shrank year-over-year, investors seemed to like the company’s focus on share buybacks.
UAL Stock Charts
Looking at the multiyear weekly chart of United stock, we see that UAL staged a powerful breakout in October-November of last year that blasted shares past their 2007 highs. From a technical perspective, however, major multiyear breakout moves like these most often see some sort of a retest of the breakout area — which for UAL stock would mean a move back toward the mid-$50s — before a next leg higher looks more probable.
But through the longer-term lens, the October/November breakout was meaningful, and a retest of the breakout area would likely make for a favorable buying spot for the tactical investor.
On the daily chart, we see that after the “last hurrah” rally following the January earnings report, UAL stock began to stall. Now, the entire price action since last December could now be looked at as a head-and-shoulders pattern. This type of pattern, with its “neckline” being the black support line, has bearish implications and might be the trigger for that aforementioned mean-reversion move back toward the bigger-picture breakout area in the mid-$50s.
I would further note that United stock has a tendency to mean-revert back to its rising 200-day simple moving average (red line), which UAL hasn’t touched since last October and thus might be overdue from a duration perspective.
Active investors and traders could look to entertain a short position in UAL stock on a drop below $63.50 for a move into the mid- to high $50s. Any major bullish reversal would be a sign to get out of the short position and potentially leg into a tactical long position.
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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.
