American Airlines (NASDAQ:AAL) reported earnings last week and investors did not celebrate the event. AAL stock continued its slide of lower highs. But today it’s trying to make a comeback on an upgrade from Deutsche Bank.
Deutsche Bank upgraded American Airlines stock from HOLD to BUY.
When AAL reported earnings last week, management beat the expectation metrics but lowered forward guidance. This is a no-no on Wall Street, but American Airline’s management had good reasons to be cautious. AAL is still struggling from the repercussions of grounding the fleet of 737 Max models.
Rescheduling that many flights caused disruptions system-wide and the problem continues to linger. Eventually, the FAA will lift the ban and this tizzy too shall pass.
Meanwhile, there could be good news in the next few weeks. The short-term chart trend continues to tighten. True, AAL has failed to snap out of the descending trend line, but this is how technical breakouts develop.
The wedge is developing and then the energy has to release itself either with a breakout or a complete failure of the floor.
But since the last three tests of the $30 floor happened under extremely difficult conditions when the markets, in general, were severely tested. Therefore, the odd are that the next breakout in American Airlines will be upwards. Last year, AAL ended with horrendous sentiment so support is likely to hold.
So if you hold American Airlines stock, continue to do so. And it could also be a decent point to start a long position in the stock. But since we still have so many geopolitical headline risks looming, I don’t take massive positions at one time.
AAL stock is badly lagging its competitors and the transportation sector. Year-to-date, AAL is only up 3% when the iShares Transportation Average ETF (NYSEARCA:IYT) and United Airlines (NASDAQ:UAL) are up over 15%. Jet Blue (NASDAQ:JBLU), Southwest Airlines (NYSE:LUV) and the S&P 500 is up over 12% to 15% for the same period.
This is even worse for the past twelves months. So clearly investors do not want to be long American Airlines stock. But therein lies a technical opportunity.
How to Approach AAL Stock Today
While the sentiment is still sour on AAL, the stock is setting a sustainable floor around $30. So regardless of what the sentiment is, eventually the price action will unfold according to the charts and in spite of the perception on Wall Street.
The debate between technical and fundamental traders is never settled and this will be an example where one can claim victory in American Airlines stock. My bet is that there will be a bounce to support the technicians’ side of the argument.
Fundamentally, the risk of owning AAL shares at these levels is not great. It only sells at a price-to-earnings ratio of 10, which is in line with its major competitors. Its price-to-sales ratio is much cheaper than Delta (NYSE:DAL) and UAL, so it’s definitely not bloated.
This makes the upside trade potential relatively safe to hold. So if you already own shares of AAL, I’d continue to do so for as long as this floor is holding. For those who have been eyeing an entry point, this is as good as any, but there are short-term lines to consider.
There is small resistance at $34.50 and $35.30, but those can serve as mini-breakout lines to bring the price action to $37.30. There lies the ledge of a sizable fall from February. If the bulls can overcome it, then they can spruce a rally to test $40.60.
Getting there will be relatively easy compared to breaking out of it. Last December, AAL stock bulls failed to breakout through the $41 zone and the effort ended in a major correction to set the Christmas lows. This wasn’t all AAL specific fears, as the whole market was in very sour sentiment condition.
Fear was rampant on Wall Street and they sold all stocks indiscriminately. I don’t think this repeats itself here without a new headline. So the American Airlines stock bulls have a decent base from which they can mount their efforts.
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.