Airline stocks are crashing, but it’s not lower — it’s higher. Call it a reverse crash, a melt-up, a buying stampede. You can pick your superlative of choice to describe just how glorious the rebound has been; they all apply. Today we’re viewing the space through the lens of American Airlines (NYSE:AAL) and AAL stock to line up a few ways to capitalize on the frenzy.
The Bullish Narrative of AAL Stock
In sizing up the historic recovery in all things airline-related, a few things become apparent. First up is volatility. The speed of the climb has even outpaced the disastrous descent in March, which is utterly incredible given how relentless the drop was. Stock prices tend to fall faster than they rise, so flipping the script like this says something about the power driving the surge.
Seemingly at once, everyone decided the massacre in airlines was a huge buying opportunity. As is often the case with market movements, there doesn’t appear to be a single catalyst that suddenly drove airline stocks to the sky.
News surrounding the global pandemic has been steadily improving. Economies are reopening, and consumers are returning to their shopping habits. Travel demand is ticking higher, and investor sentiment is rapidly warming. Friday’s jobs report smashed expectations and bolstered the narrative that many layoffs were temporary. Tack on a few trillion in Federal and Government stimulus, and you’ve crafted quite the potent bullish brew.
I think technical analysis provides a big reason for the timing of the sudden awakening. Airlines finally took out a significant resistance zone.
JETS to the Moon
Wall Street’s new favorite fund for tracking and trading all things airlines is the US Global Jets ETF (NYSEARCA:JETS). It provides a one-stop-shop for analyzing the entire industry. American Airlines stock carries the largest weighting of the basket, with United Airlines (NYSE:UAL), Southwest Airlines (NYSE:LUV), Delta Airlines (NYSE:DAL), and Skywest (NYSE:SKYW) rounding out the top five.
One interesting dynamic to the recent bonanza is the indiscriminate buying beneath the surface. Airline stocks have fused into one giant blob, with everything rising together. Individual fundamentals have gone out the window, and it hasn’t mattered which airliner you own. Such is often the case during a crash or bear market when risk-off rules and investors want out. Perhaps it’s appropriate that the current reverse crash is mirroring the same principle.
JETS provides a clear picture of the resistance zones that arose through March, April, and May. $16 to $17 defined the top side of the range and were the lines that needed clearing to signal recovery was finally afoot. I don’t think it’s any coincidence that the volume surge came after the ceiling fell.
While some backing-and-filling is certainly warranted after such a wicked rise, JETS still has room to run to its 200-day moving average.
American Airlines Stock Trades
AAL stock staged a breakout of its own alongside the JETS ETF. For two months, $13 has stymied each takeoff attempt. When it finally blasted above it last Thursday, volume exploded with around 400 million shares traded for two consecutive sessions. I suspect there was a great deal of short covering mixed in with the fresh buyers boarding the stock.
Thursday’s high returned AAL to its descending 200-day moving average. With the stock having doubled over the past week, my guess is the explosive phase of the rebound is nearing an end. It doesn’t mean AAL won’t keep working higher, but the rate of ascent will be tamer.
If you’re looking for new longs, you have to realize the risk/reward isn’t as favorable given its overstretched status. For those buying shares, I suggest using a tight stop or be willing to sit through the inevitable pullback or pause that will develop over the coming weeks.
Another option is selling puts to increase your probability of profit. Premiums remain sky high due to the incredible volatility, and that translates into a high return on investment.
The Trade: Sell the July $15 puts for around $1.45.
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