Airline stocks came under pressure on Wednesday on the back of some concerning comments from United Continental Holdings Inc (NYSE:UAL) around capacity boost, which would translate into higher costs for the company. Personally I now see no major reason to buy UAL stock, but shares of Delta Air Lines, Inc. (NYSE:DAL) have as a result fallen right into a technical confluence area of support, where a next buying opportunity may be setting up.
As I often discuss in this column, stocks as an asset class are highly correlated. Somewhere around 60%-80% of stocks move up and down together directionally, and this correlation is on the higher end within any given sector or industry group of stocks.
The trade idea we are looking at today is one that very much takes this positive correlation among stocks into consideration.
DAL Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
Starting off with the multiyear weekly chart of DAL stock, we see that just two weeks ago, the week of Jan. 8, the stock scored a major breakout past a simple and well-defined line of resistance. So you know — and this is important — charts of other major U.S. airlines (UAL stock not including) have longer-term charts that look very similar to that of DAL stock.
With Wednesday’s 5.22% drop as a result of the aforementioned news from United Continental, DAL stock has now dropped right back to this former area of technical resistance around the $55 area. A simple rule of technical analysis 101 is that if a breakout is truly valid, then not only should former resistance hold as support but it often also gets re-tested. In that vein, Wednesday’s drop in the stock was healthy and could provide aware traders and investors with a buying opportunity.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that following the earnings report by Delta Air Lines on Jan. 11, DAL stock rallied and this resulted in the aforementioned breakout on the weekly chart. The stock then trotted sideways for a few days until dropping right back to near the pre-earnings levels yesterday.
From here, while more near-term gyration is possible, the next strong bullish reversal in DAL stock would likely provide a buying opportunity with great odds of a move higher back toward the $60 area as a next upside target, followed by a move toward $65 in coming months, all else being equal.
Check out Anthony Mirhaydari’s Daily Market Outlook for Jan. 25.
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