Airline stocks have hit some serious turbulence … and not the mild, bumpy kind. We’re talking a lose-your-lunch, buckle-your-seat-belt-or-die type of turbulence. The entire sector — from Delta Air Lines, Inc. (NYSE:DAL) and Southwest Airlines Co (NYSE:LUV) to JetBlue Airways Corporation (NASDAQ:JBLU) and Alaska Air Group, Inc. (NYSE:ALK) — has fallen into extremely steep downtrends. Since they all boast similar patterns, we’ll focus on DAL stock for today’s commentary.
Relative weakness was on full display Wednesday. While the S&P 500 fell a mere 0.36%, the Dow Jones U.S. Airline Index stumbled 2.8% on heavy volume. The biggest losers on my watch list were all airliners, like DAL stock.
And yesterday wasn’t a one-off; the entire space has been hot garbage for two months now. The Airline Index has cratered 19% since mid-July, placing it one banana peel away from an official bear market.
The Swoon in Airline Stocks
For a blow-by-blow account of the nosedive, look no further than the accompanying daily chart of the Airline Index. The ongoing descent has driven prices below the 20-day, 50-day and 200-day moving averages. This week’s plunge continued the series of lower pivot lows by carrying the index to a fresh 52-week low.
The selling hasn’t been isolated to small traders. Distribution days litter the landscape, showing institutions are leaning heavily on the sell button.
The depth of the downturn is illustrated clearly in the Relative Strength Index (RSI) indicator, which just fell to 20. While such a low reading confirms the sellers’ strength, it also suggests the rubber band may be a touch too stretched at this point. For as bearish as the airline space looks, I’m not a fan of chasing down here. Heck, the RSI is down 8.5% in the past five trading sessions alone, making this far from a low-risk entry for new bearish trades.
What’s more, we’re now testing a major support level ($245), one which halted the last significant correction in March. The posture of the Index should color our perspective, at least in part, for DAL stock.
A glance at Delta’s weekly price chart leaves some room for optimism — it hasn’t completely upended the long-term uptrend. The past six weeks of selling have breached the 50-week moving average, but we are still above the last major pivot low ($43.81) from in April. As long as the stock remains above this threshold, it will maintain at least a neutral outlook on the larger time frame.
Unsurprisingly, the daily chart looks similar to the Airline Index.
The price trend is submerged beneath every major moving average. And the volume indicator is laced with distribution days confirming the Delta stock’s fall from grace. With the magnitude of its descent, the RSI indicator has now officially entered oversold territory.
Such extreme readings in the past have lined up well with short-term lows in the stock.
Here’s the bottom line: Delta is bearish but extended. You either play the anticipated snap-back or wait for the rally and then go short near resistance.
DAL Stock Is Your Ticket to Profits
Since the next tradeable swing for the stock is up, I’m throwing out a bullish trade idea here. I do suggest waiting for signs that the stock is reversing higher before pulling the trigger, however. Anytime I consider a counter-trend trade like this, I’m always defaulting to selling out-of-the-money puts or put spreads for two primary reasons:
- It creates a wide profit range giving the stock plenty of fudge room in case it falls a few more days before the rebound finally arrives.
- The swiftness of the stock’s drop usually juices the value of puts making them more ripe for the selling.
Sell the Oct $43 puts for 80 cents. To minimize the damage if DAL stock is unable to pull out of its tailspin, exit the trade on a break below $43.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.