Transportation stocks as a group and as represented by the iShares Dow Jones Transport. Avg. (ETF) (BATS:IYT) after some recent turmoil during earnings season have bounced over the past few days and are now once again higher by about 4% year to date collectively. Some airline stocks, such as Delta Air Lines, Inc. (NYSE:DAL) are looking particularly interesting from a trading perspective as clear technical support allows for well-defined risk/reward setups.
Before digging into the trade setup in DAL stock today, allow me to say a quick word on risk management. Many if not most traders and market participants in general tend to focus on the reward potential of any given setup.
This automatically puts them in a vulnerable state of mind, as they will psychologically not be prepared to handle the situation when the trade goes against them.
Any successful market participant I have ever met always focuses on the potential risk first and foremost.
DAL Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the first chart, I plotted DAL stock in the top part and the IYT ETF at the bottom. Note that the two charts share plenty of similarities, as they both saw a breakout this year past multiyear resistance and are now retesting or marginally undershooting back toward this former area of resistance that may now turn into support.
The longer-term moving averages are all pointing higher which, from a structural perspective, does still put the odds in favor of buying dips in both charts.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
Since Delta Air Lines reported its latest batch of earnings on July 13, DAL stock dropped roughly 10% before finding support in recent days and beginning a bounce. And that support area is indeed the focus of today’s trade idea. Specifically, the area around $48.50-$50 is what I consider to be a “confluence support area,” in this case made up of the red 200 day and the blue 100 day simple moving average, the black diagonal line as well as a Fibonacci support area.
While the stock from here could move higher toward the low to mid $50s as a reward, above all what’s to like in my eye is the well-defined risk around this confluence support area. From a trading perspective such clearly defined risk is really all that a reasonable market participant can ask for in any given trading setup.
Very simply, traders could consider buying the stock around the $49-$50 area but respect any break below $48.50 as a stop loss.
As a side note, Delta Air Lines is scheduled to pay a dividend of 30.5 cents per share on Aug. 21, which is to say that on that day the stock will drop by the amount of the dividend payment, all else being equal. The technical setup I am seeing here, however, should not be influenced much by this dividend distribution.
Check out Anthony Mirhaydari’s Daily Market Outlook for Aug. 16.
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