American Airlines (NASDAQ:AAL) has been one of the more volatile names for the airline industry. Like most, AAL stock was hammered from its 2020 highs, but it led a jaw-dropping rebound from the March lows. Since then, shares have settled down quite a bit as investors have refocused on reality.
That reality is, multiple airlines have reported earnings now – including American – and management is telling us that the rebound is stalling. Why? Because novel coronavirus cases are back on the rise. As cases rise, travel trends are plateauing.
What once appeared to be a strong and vibrant rebound in travel – for better or for worse – now has waning momentum. Of course, that’s not too surprising, but to hear it from management draws concern. For AAL stock, that’s bad news.
Breaking Down American Airlines
American Airlines reported earnings in late July and the results were not very good. On the plus side, that didn’t really take investors by surprise, as it was pretty clear that Q2 was going to be horrendous for the airlines.
The company actually beat on top- and bottom-line expectations, but boy was it ugly. In the report, management talked about ample liquidity, which sat at $10 billion at the end of the quarter. Cash-burn had averaged $55 million a day in the quarter, but was down to $30 million in the month of June.
This was the concern though, (bold emphasis added):
“Passenger demand and load factors have improved since bottoming out in April, but continue to be significantly below 2019 levels. While May and June revenue trends were encouraging, demand has weakened somewhat during July as COVID-19 cases have increased and new travel restrictions have been put into place.”
We have now heard that from multiple management teams, including United Airlines (NASDAQ:UAL) and Spirit Airlines (NYSE:SAVE). Delta Air Lines (NYSE:DAL) CEO said it will be a couple of years before we see a sustainable recovery.
If comments from management aren’t enough proof, check out the chart of TSA traffic. While it shows a pretty steady recovery from the lows, it has really leveled off in the month of July. That’s not good for the industry, whether we’re talking about the best players or the worst.
On that note, while American is trying its hardest, it doesn’t have the same strength as some of the other airlines. Spirit Airlines has cut down its cash burn the most and should be the quickest to turn profitable in the industry. Southwest Airlines (NYSE:LUV) has the best balance sheet in the group.
Trading AAL Stock
Though I said the charts are keeping me out of this one, the reality is everything is keeping me out. But the charts are the main one. That is, unless it can gain some upside momentum.
Currently, AAL stock is below all of its major moving averages, while the 20-day moving average continues to act as resistance. Multiple times over the last month, shares tested up into this level, only to be rejected.
Put simply, American Airlines stock is having trouble getting off the mat, let alone dancing in the ring. But there are some signs of hope. Support at $11 continues to hold, while shares look like they want to break over resistance. Bears will say the stock looks like it wants to break down though, as a descending triangle takes hold.
If AAL stock closes above the 20-day moving average, look for a possible run to the 50-day. Above that puts the July high in play at $14.29. On the flip side, if American can’t close above the 20-day, we have to watch for a break of $11. In that case it could put the $9 to $10 area in play and possibly a retest of the May low.
At a time where the broader market continues to chug higher, there’s no other way to say it: The charts do not indicate AAL stock is a buy at the moment, nor do its fundamentals. Let’s wait for more clarity on the technicals.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.