Airline stocks have seen a tough going so far in 2015, but while further downside could be in the cards, many of these stocks have reached oversold readings that could lead to a good-sized bounce.
For instance, shares of American Airlines Group Inc (NASDAQ:AAL) earlier this month reached oversold readings at a technical confluence support zone. Then last Friday, AAL stock gave a promising bounce along with other stocks in the transportation sector.
The past few months of relative weakness in the transportation stocks versus the Dow Jones Industrial Average and other indices has been well documented. This Dow Theory signal is certainly concerning, but once conviction of traders and investors gets too high (i.e., the signal becomes consensus), that’s when strong counter-trend bounces occur.
With that in mind, let’s look at the below chart of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) in blue and the iShares Dow Jones Transport. Avg. (ETF) (NYSEARCA:IYT) in red.
The underperformance of the red line is visually obvious. To put this into better historical context, however, I measured the spread between the two (SPY-IYT) and illustrated this at the bottom of the chart.
The current and recent high levels of the spread was last matched in 2007, just as the financial crisis kicked into high gear. In other words, some mean-reversion of this spread may be in order (at least in the short term).
AAL Stock Charts
Moving over to the multiyear weekly chart of AAL stock, we see that earlier this month, the year-to-date selloff measured almost 30% as American Airlines bumped into the 2013 support line, where the recent bounce began.
The daily chart below gives us additional perspective.
First, note that the early June bounce off the 2013 support line also coincided with a 61.8% Fibonacci retracement of the entire rally from October 2014 into the January top. Next, note that after the June 9 lows, a marginally higher low ensued on June 17, which was further confirmed with last Friday’s nearly 4% pop in the stock that filled the June 9 down-gap.
In other words, the price action over the past couple of weeks — especially considering the medium- and longer-term technical juncture of where it occurred — looks to have completed a solid bullish reversal.
Active investors and traders could look to buy AAL stock around the $41 or higher with an initial price target near the $44 area, while any sharp bearish reversal of last Friday’s gains would call off the trade for the time being and until another bullish candle rears its head.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
