American Airlines: Technical Turbulence Ahead for AAL Stock

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Last week’s massive technical takeoff from corrective lows appears to be running low on fuel. And one name to profit from a weak sector and price chart is American Airlines (AAL), using an long put strategy with AAL stock.

Prior to the last couple of weeks and a broader market meltdown from all-time highs, transportation stocks such as airlines like Delta (DAL) and United Continental Holdings (UAL) have been leading technical laggards in 2015. And AAL stock remains one of the weakest, with shares in technical position for lower prices.

American Airlines Stock Daily Chart

aal-stock-chart
Source: Charts by TradingView

Looking at the daily chart of AAL stock, shares topped out in late winter and early spring in a double-top pattern. From there, a lower high followed by a flag formation resulted in a bearish wide-range candle through the 200-day simple moving average.

Also promising for bears as a change of trend in AAL stock, the very clean break through long-term support was the last time shares of American Airlines were above the moving average.

Subsequently, the bearish technical footprints have only grown for shares of American Airlines. Since June, AAL stock built and then broke below a price consolidation and flag pattern that developed around the 50-day simple moving average, sending AAL to fresh year-to-date lows.

Most recently, after setting fresh lows from the pattern breakdown over the past week, shares of AAL stock have unsurprisingly snapped back higher. However, the move in AAL appears to be nothing more than a swift counter-trend rally that has found zone resistance from the prior congestion pattern and 50-day simple moving average.

American Airlines Stock Bear Put Spread

aal-volatility-chart
Source: Charts by TradingView

Given that we’re heading into the historically weak months of September and October and option premiums have pulled back aggressively from last week’s highs, I like the idea of buying a slightly out-of-the money put in October.

Initiating a position with a simple long put can be an attractive proposition for bearish traders in American Airlines. This strategist also recommends a 50% money stop to guard against eventual time decay, the potential for lower implied volatility or an unfavorable bullish turn higher in AAL stock.

Also, by respecting the described factors, a simple long put strategy in AAL stock allows for quicker profits than most spreads, and it makes future adjustments or exiting easier, as well.

Checking the options board in AAL stock for ideas, the October $37 put is priced at $1.60 mid-market with shares currently near $39. For additional money management, I’d suggest using a 50% money stop on the AAL put; or, on the American Airlines price chart, use a move above $42.25 in the stock as an exit to limit losses.

The price level of $42.25 was chosen because it should work out to a similar dollar amount in containing the loss of premium in the long put on AAL stock. Technically speaking, it also works to allow sufficient wiggle room in AAL without getting shaken out too easy, while also respecting a decent penetration of 3% above the 50-day simple moving average as a bullish signal for bears to exit.

On the upside — or in this case, profiting from the downside in AAL stock — I’d begin to actively look for hedging adjustments if shares of AAL trade to $37. At that point, the put is at-the-money, which down the road could face larger time decay and volatility issues if profitable action isn’t taken a bit sooner, rather than much later on in the option’s life.

Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2015/09/american-airlines-technical-turbulence-ahead-aal-stock/.

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