The stock market has made a sharp recovery off its December lows. The nasty sentiment that ruled Wall Street last year has flipped on its head and the indices are back near all-time highs. Even the iShares Transportation Average ETF (BATS:IYT) is within 8% of its all-time highs. Yet, American Airlines (NASDAQ:AAL) stock is over 40% below its peak.
Despite the fact that airline businesses are now healthier than ever, AAL stock is wallowing at the bottom end of its five-year range.
It’s concerning that even when AAL has the wind at its sails, the stock still lags on Wall Street. For a better perspective, American Airlines Stock is now 15% below where it was during the November 2016 U.S. presidential elections.
Fundamentally the business is healthy. AAL has pricing power and it gives almost no more frills. Passengers now even have to pay to reserve their seats. Moreover, oil, which is a major operating expense for airlines, is well off its highs. Yet for some reason, investors still don’t trust AAL stock.
As a result, American Airlines stock is cheap. It sells at a price-to-earnings ratio of 11, which is in line with all its major competitors. So there is no froth in the stock. And these are lean valuations so the downside risk is by definition relatively small.
This is not to say that it hasn’t had its moments. AAL stock rose to $58 in January 2018. But since then it has been sliding into an abyss. And that’s where the opportunity lies. There is hope on the horizon for AAL and the opportunity is based in technicals, so we don’t have to rely on gaining the trust of traders.
How to Approach AAL Stock Today
The fall from grace has been dramatic. For over a year, American Airlines stock has been trading inside a descending channel of lower highs and lower lows. But since late last year, it has formed a trough. The lows from the October, December and March corrections are at about the same levels. So it is forming a support zone.
Moreover, this also coincides with the lows from 2016 and 2014. So it is safe to assume that AAL has fallen into a long-term pivot area. These tend to be support on the way down because both bulls and bears want to fight it out hard and this creates congestion in the price action.
So the opportunity is that the bearish channel has transformed into a descending wedge which is coming into a pinch soon. It will set lower highs without setting lower lows, thereby creating tension that will result in a breakout to start a big bounce.
The exact level that would trigger the rally is a moving target so it is best to be patient to get more clues. But it looks like if AAL closes above $36 per share it could invite momentum buyers. There will be resistance at $37.30 and near $41 per share, but the upside potential could be as high as $45 per share.
Ideally one would wait for the trigger to initiate the trade but as cheap as AAL stock is now, I can’t blame anyone who wants to jump the gun, especially if they intend to hold the stock for a long time.
Earnings are coming soon, so the implied volatility will be high in AAL. I like the idea of selling puts now and then adding the shares after the breakout happens. This way, if AAL falls on the headline, I would have a nice buffer before suffering losses.
The bottom line is that American Airlines stock has a technical opportunity coming that could carry it to ignite a big rally. This would come regardless of the lack of love on Wall Street.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.