by Serge Berger | July 8, 2014 7:55 am
Shares of Delta Air Lines (DAL) have had an amazing run for the past 18 months or so, but DAL stock is starting to show signs of rolling over. Delta’s most recently rally off the April lows was too steep to sustain, and in the meantime, DAL has carved out a concerning topping pattern that the bulls would be wise to respect — and that the bears could use to their advantage.
Airlines typically are lousy businesses, constantly penetrated by regulatory issues, price wars and exposure to oil prices. One of the best money managers I know often tells me that airline stocks should only ever be shorted. Of course, that’s all a matter of time frames, but his point is that any negative news tends to affect the airline stocks more so than it would other stocks.
Delta Air Lines is scheduled to report earnings in just about two weeks from today (July 23), and while I am no fan of holding trading positions through earnings announcements, given the forces at work, DAL stock now looks to stand a good chance of seeing further weakness ahead of the upcoming earnings announcement.
On June 30, Morgan Stanley made some positive comments about the airline industry, in particular on United Continental (UAL). This didn’t help airline stocks, however, which are trading well lower since. Then on July 2, Moody’s upgraded Delta’s credit rating to Ba3 from B1, and while that’s good news, the rating still remains “speculative grade” as opposed to the better “investment grade.” DAL shares dropped nearly 5% on the day.
Typically, selling on good news isn’t a good sign.
Looking at the 18-month chart of DAL stock, note that from December 2012 up to the recent highs in June, the stock rallied about 350%. While Delta has done so in an extremely orderly fashion — all along holding its 50- and 100-day simple moving averages (yellow and blue lines, respectively) — the rally off the April lows shot the stock out of the channel (black parallels), which now looks to be followed by an equally sharp mean-reversion move lower.
On the daily chart, we see that since overshooting in June, DAL stock has since come back into the channel but also broken below its 50-day moving average.
What’s different about this most recent decline in DAL stock than other pullbacks over the past 18 months is that it comes on the back of what looks to have been exhaustion buying into June. This also should lead to a bigger pullback.
The 100-day moving average (blue line) might offer some support, but if that’s broken, then a move toward $33-$34 would be in the cards.
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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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