Lost in the hubbub surrounding Facebook‘s (NASDAQ:FB) epic earnings fail yesterday were a few companies that soared on the day. Southwest Airlines (NYSE:LUV) was one of the standouts, rocketing 8.4% higher in response to an earnings announcement worth celebrating. Not surprisingly, the bubbly sentiment spilled into other airline stocks, lifting the entire industry.
LUV stock was in desperate need of a positive catalyst heading into the release. Since topping in January just shy of $67, Southwest shares were down 22%, falling well below the 200-day moving average. The 50-day and 20-day were descending alongside the price until the downward momentum finally slowed last month.
We did see some bottoming action in recent weeks, showing buyers are finally putting up a fight.
But with Thursday’s rousing rally, LUV stock is now officially back in a daily uptrend. That means spectators should switch their stripes from selling rallies to buying dips. If we see any kind of pause or pullback in the coming days as Thursday’s gains get digested, I suggest using the weakness to deploy bullish trades.
Earnings announcements tend to set the tone for weeks to come, so the path of least resistance for Southwest is now higher.
In identifying potential upside targets, I suggest keying in on previous unfilled gaps or pivot highs. The first zone is $58.50, which marks the gap from the March 21 plunge. If that window begins to close, I expect prices to then test overhead resistance at $61.50.
LUV Stock Call Spreads
To capitalize on an eventual run toward $60, consider buying the Oct $55/$60 bull call spread for $2.30. Your risk is limited to the initial cost and will be lost if LUV stock sits below $55 at expiration. The potential reward is $2.70 and will be captured if the stock can rise above $60.
By paying $230 to potentially capture $270, the spread offers a potential 117% return.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
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