Trading airline stocks this year has been very exciting, to say the least. The travel and leisure sectors were in the direct line of fire from the virus crisis. Delta Air Lines (NYSE:DAL) stock suffered tremendously as it lost 70% of its stock value from the February levels to the March lows.
DAL stock has clawed back a lot of the losses but still is far from good. Therein lies an opportunity to trade it against the ranges that have developed in the last few months.
The price action is still unfolding from the novel coronavirus debacle, but we now have several starts and stops that offer guidance. The point of today’s write-up is to share an entry point that has reasonable expectations of profit through next year.
The bounce off the bottom was too strong, so half of it disappeared very quickly. Since then the stock has been consolidating for weeks and at mid-range of the rally. This is all to say that the price action in DAL stock is normalizing so now as cooler heads are prevailing.
Investors can now make better decisions for the long term.
A Battle Between Fundamentals and Technicals
In the short term, there’s no denying that the fundamentals for all airlines are still terrible. According to the TSA screenings, the traffic is down over 70% to last year.
I tabulated the data to show that the rate of improvement has stalled recently. I personally flew this month overseas and I can attest that the airports and customs areas were virtually empty. On the other hand, the four flights I took were oversold, so airlines are adjusting their operations to fit the current needs.
So far, they are doing a good job to stem the cash bleed. In addition, they shored up their balance sheets to withstand the rest of the year’s pain or for as long as Covid-19 fears lingers.
I wrote an article in the middle of June about trading Delta stock and in it I was somewhat bearish. I didn’t have an issue with the fact that it bounced off the bottom but rather what the buyers were chasing back then.
Adding debt to the balance sheet while the company had no sales was not a reason to rejoice. The airlines had raised record amounts of debt so now there is no room for mistakes. Nevertheless I was open to more upside but I noted the importance of breaking above $37.50 per share. That never happened because the stock failed at $37.24 on June 5. The resistance levels I shared back then were perfect.
Feel Better Now About DAL Stock
I don’t take pleasure in seeing stocks fall and I am not a perma-bear on DAL stock. The potential pitfalls were evident back then and I merely noted them. In the absence of fundamentals it is so important to follow the technicals. They say “price is truth,” and it was prophetic this time.
Today I take the other side. My bullish assumption is that DAL has set a tradable bottom. The test that the stock endured from the quarantine was as hard as it’s going to get in a long while, if not ever. The whole world stopped working so it should serve as a solid floor at least for this year.
This opens the door for investors who wanted to be long DAL stock the first time it bounced to get on board. They can do so with confidence that over the long term they are not buying a clear top. In fact, they are more likely buying just above a generational bottom because we are not likely to ever see another global shutdown again. Governments simply cannot afford it.
In my June article and in addition to my caution over the resistance line, I noted that near $24 per share would be a good place to buy the dip. Well, here we are toying with it now and I don’t need to wait for a perfect tag of it. This whole zone is supportive so down here, DAL stock is a better buy than a sell.
It is understandable to be hesitant about it, so consider taking baby steps with a partial starter position. There is still tremendous risk for airlines and economies in general because there is still no vaccine and people are still freaked out about close quarters. This by definition raises doubt and weakens the conviction of any trade regardless of how sound it seems.
What makes more sense is to start small and build upon it as more information becomes available.
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.
