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This morning, I am recommending a bearish trade on American Airlines Group, Inc. (NASDAQ:AAL).
My indicators are giving solid sell signals again this week as the current market correction continues. The S&P 500 index has now fallen over 5% from its most recent high as the trade situation with China drags on and shows few signs of progress.
Daily Chart of the S&P 500 (SPX) — Chart Source: TradingView
As you can see in the chart above, the S&P has formed what traders call a “head-and-shoulders” bearish reversal pattern.
Typically, when a head-and-shoulders bearish reversal pattern is confirmed, a drop equal to the height of the pattern is expected. In this case, the formation is indicating that another 150 point drop in the S&P could be in store.
If that happens, the S&P would find itself down in the 2,650 area. This is, of course, not a guarantee that the market will continue to drop. But with S&P futures trading below the 200-day moving average this morning, it does look like the bearish action will continue.
I am recommending a bearish put option on AAL because I want to continue to seek profits while the market is moving to the downside. AAL has come up against some fundamental and technical issues, and that makes it a good target for a bearish play.
Labor Issues and Poor Earnings
Last week, AAL filed a lawsuit against the Transport Workers Union of America and the International Association of Machinists, claiming the unions are engaging in an illegal slowdown. AAL has been in labor talks with these groups since 2015, and the company believes the slowdown is the unions’ attempt to gain leverage.
The labor slowdown has caused flight cancellations and maintenance delays, and analysts at Morgan Stanley warned that these issues were making AAL a riskier investment.
AAL also had a mixed earnings report in late April. According to Zacks, the company beat earnings per share estimates and missed revenue estimates.
With the labor issues ongoing, a mixed report won’t fill investors with confidence. That makes AAL’s fundamental outlook less than ideal.
Down More Than 14% Since Earnings
The technical picture for AAL doesn’t look much better. The stock has lost a significant amount of value since its last earnings report, and as you can see on the daily chart below, AAL doesn’t have any recent support to buoy its price. That’s because it hasn’t been this low since 2016.
Daily Chart of American Airlines Group, Inc. (AAL) — Chart Source: TradingView
Falling oil prices might ease some of the downward pressure on AAL, but as long as labor issues continue to cause problems, I think the stock will keep falling. For that reason, I’m recommending a bearish put option on the stock.
Buy to open the American Airlines Group Inc. (AAL) Aug. 16th $26 Puts (AAL190816P00026000) at $1.10 or lower.
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InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.