American Airlines Sinks In Front of Earnings. Here’s How to Trade It

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Wednesday’s session has been a less-than-friendly trip for investors in American Airlines (NASDAQ:AAL) in front of tomorrow morning’s earnings report. But is AAL stock crashing for good or just dealing with a bit of turbulence on and off the price chart? Let’s take a look.

Airline stocks are tumbling lower Wednesday courtesy of United Continental Holdings Inc (NYSE:UAL ) and the sympathy-related blame game. The airline operator announced better-than-expected earnings, but the quarterly numbers were trumped by the company’s ambitious growth plans as investors have slammed the airline group on overcapacity and ticket price war fears.

For its part UAL stock is off nearly 11.50%, Delta Air Lines, Inc. (NYSE:DAL) is off 6.50% and in front of Thursday’s premarket earnings announcement AAL stock is down 7.35%.

AAL Stock Earnings Picture

Ahead of AAL’s Q4 earnings release analysts are forecasting profits of 84 cents per share. Range estimates are from 60 to 95 cents per share of AAL stock.

Street expectations imply a profit decline from the year-ago period of 8 cents and second-straight quarter of sequentially lower earnings since peaking at $1.92 in Q2. AAL stock’s revenues are expected to dip sequentially, but grow year-over-year to $10.5 billion compared to 2016’s $Q4 take of $9.8 billion.

Prior, American Airlines issued a stronger outlook for its consolidated ‘total revenue per available seat miles’ or TRASM. The key measure of unit sales is forecast to rise by 5 — 6% year-over-year due to universally higher geographic yields and stronger domestic close-in bookings according to Zack’s research.

Analyst Community

The Wall Street community is mixed with a bullish lean on AAL stock. Among polled analysts, half retain buy ratings on shares compared to one outperform, 8 hold recommendations and one firm rates shares as an “underperform.” Compared to a current price near $54, the 12-month median price target on AAL stock is $60, representing upside of 11%.

AAL Stock Short-Term Trading Record

AAL stock has established a solid pattern of beating Street profit views as the company has topped estimates in 11 of its last 12 quarters. At the same time, investor reaction responsible for the bottom-line on the AAL stock chart has proven a good deal more mixed in the report’s aftermath.

Working backward over the past several quarters and from the most recent earnings event, shares of AAL have moved -4.72%, 0.98%, -5.22%, -5.32%, -0.10% and 4.00% on a close-to-close basis.

The net reaction in AAL stock has produced an average loss of -1.73% with a variability of 3.92% based on a one standard deviation reading. Combining the two metrics and the recent price history in IBM has favored bears with an estimated range of -5.64% to a more modest gain of 2.19%.

AAL’s seven-day stock performance has also proven volatile with a bearish emphasis yielding an average loss of -3.50%, variability of 5.43% and a tied at the hip estimated range of -9.93% to 1.93%.

AAL Stock Weekly Chart

Source: Charts by TradingView

If you’re looking to fly the friendly skies, the weekly chart of AAL stock offers up a nice uptrend which recently saw shares hit all-time-highs. But and as Wednesday is a testament, the ride can be bumpy at times and maybe not for the faint-hearted.

The current tailspin lower has taken AAL stock back below the prior all-time-high set in late 2014. Bearish prognosticators will be quick to point out the price action has established a variation of a double top pattern.

Our technical assessment is AAL does have some room to correct further. However, with up-channel and Fibonacci levels not far below and forming a nice support zone; waiting to buy shares of American Airlines on any additional weakness looks attractive.

AAL Stock Options Pricing

The Weeklys January contract is the purest play on AAL stock as there’s less opportunity for the reaction by traders to be impacted by broader market noise. Of course, it should be stressed that bulls and bears positioning in these contracts live and die by the immediate reaction to the report.

During Wednesday’s session and honing in on those short-term options, the out-of-the-money 26 Jan $55, $57.5 and $60 are all seeing decent action. But with trading activity less than open interest in each of the contracts it’s difficult to speculate on those traders collective intentions.

Looking at option prices more closely, with shares at $53.90, the at-the-money 26 Jan $54 straddle market points to a 68% chance AAL will remain within an approximate price range of $51 to $56.80 into Friday’s expiration. The math behind this calculation is based on implied volatility of 73% with two trading sessions remaining.

The dollar move up or down works out to expected wiggle room of about +/-5.4% in AAL by Friday’s close. In weighing both recent one and 7-day reactions, it appears options traders are pricing in a volatile, but mostly normal earnings reaction in AAL stock.

Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.

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/2018/01/american-airlines-sinks-in-front-of-earnings-heres-how-to-trade-it/.

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