American Airlines Group Inc (NASDAQ:AAL), while still trading notably lower for the year, has shown some better price action of late. Considering the still-low price of oil and a technically sounder pattern, AAL stock could be a good long position with defined risk and reward for the rest of 2015.
When analysts discuss shares of airline stocks, a lot of focus inevitably is spent on oil prices and how well the airlines are hedged to an outsized move in oil. That’s fine — oil prices are important when it comes to airline stocks — but economic activity shouldn’t be ignored.
Hence, the year-to-date slowing rate of change in economic data points has weighed on AAL stock and other airlines as a group despite the sharp drop in oil prices since the summer of 2014.
At some point, though, a sharply lower oil price should begin to act as a put for airline stocks, particularly when oil drops from over $100 a share to under $40 a share over the span of about 14 months. In other words, at some point, even if revenue for the airlines were to slide it should at least in part be offset by the sharp drop in oil prices.
The velocity of the drop in oil in the second half of 2014 likely meant that hedges or forward contracts could not be unwound so as to profit from the lower oil prices right away. After more than 12 months now however, the positive impact of a sharply lower oil price should start to benefit airline stocks.
AAL Stock Charts
If we peg AAL stock versus the price of oil, as represented by the United States Oil Fund ETF (NYSEARCA:USO) we see a series of higher lows since June. which represents the still weak price of oil but relative strength of AAL stock.
On the daily price chart of AAL stock, we see a bullish wedging pattern (black lines) in play that shows the stock is looking to break out of to the upside. The August dip in American Airlines, which came as a result of the broader market weakness, formed a lower low in price for the year-to-date, but a higher low in the Relative Strength Index at the bottom of the chart.
At this stage, given the still-weak broader market and high correlation among stocks, AAL stock does not necessarily scream a blind buy right here right now, but rather the stock may have limited downside given the positive impact of the sharply lower oil price and the more constructive-looking technical angle.
Active investors now could either look to buy American Airlines on a break above diagonal resistance and above its blue 100-day moving average, or upon the next dip lower, as long as the late-August lows hold on a weekly closing basis. AAL stock then has upside into the high $40s through a multimonth lens.
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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. As of this writing, he did not hold a position in any of the aforementioned securities.
