It is rarely a good idea to chase massive stock spikes like the one that happened yesterday. Pfizer (NYSE:PFE) delivered the great news that its vaccine promises to be more than 90% effective. Investors breathed a heavy sigh of relief. The problem with relief pops is that they fade. PFE did not indicate that the availability was imminent, yet stocks rallied as if we found a cure effective today. Among them, Delta Airlines (NYSE:DAL) rallied 17% and that wasn’t even the high of the day. Having a vaccine would be great for Delta Air Lines stock because it suggests more travel activity.
My note today will sound like I am bearish, but I am not. In fact, my last write up about DAL stock was bullish. I want them to succeed so that thousands of their employees don’t lose their jobs.
Those who are long the stock already have gains and can stay long. Newcomers should be more patient.
The Monday spike was great news for investors who are already long Delta Air Lines stock. But it makes for a potential bull trap for those joining the party too late. Near $37 per share, DAL stock will face levels that should be more difficult for buyers.
I’ve been on the bullish side of the stock almost on every dip. But I’ve also suggested fading the extreme spikes mid-June and to buy the dips closer to $24. All of this worked out well back then and apply here today.
Delta Air Lines Stock Could Repeat the June Swoon
The message now is almost exactly the same. From here it’s best to either chase the breakout above Monday’s high, or buy the dip. The reward from an even higher high this week could take it to eventually challenge $50 per share. It would make better sense if it fades a little to set better footing.
Fundamentally DAL stock is still heavily hurt. They are still bleeding millions every day because of low demand. The whole airline industry is still in dire straits.
According to the TSA screenings, traffic is down 60% to last year. This is about a 10% point improvement in recent trends but far from normal still. The news from Pfizer does not flip a switch on that but it helps a lot. Having the vaccine eventually could be the thing people need to travel more.
Meanwhile, Wall Street likes to price everything in right away. Then they spend a few weeks mulling it over sideways to down. This would constitute normal price action, and that’s how the bulls gather momentum for more upside.
Better Be Safe Than Sorry
The cautious tone today is not against the company’s prospects. This is purely a reminder that nothing rallies forever without establishing better bases. The bulls are now in charge of DAL stock so my cautionary tale is merely a note of patience.
I was right in June and I think I can be right again here. I reiterate the strategy now albeit the dip shouldn’t be as deep as before. Waiting to buy-the-dip or chasing the breakout after confirmation are the best courses of action. Again, those in it for the long haul did well off the March lows.
The environment is improving for the whole cohort and they’ve raised the cash they need to sit through it. Delta Airlines will emerge out of this crisis stronger than ever. Management has retained good spending habits and is making more with what they have. They’ve also gone to great lengths to shore up their cash positions. It looks like the good news is coming and that it’s only a matter of time.
Sentiment is a huge variable in the stock prices. Unfortunately, it is fickle and it swings wildly in either directions. On Monday everybody was too happy all at the same time. In my experience, it is best to sit those out and book some short-term profits. Those who are looking for new positions would be risking a lot in the short term buying the massive spikes.
The stock fell more than 7% in mere minutes on the day of the Pfizer news. If investors have more discipline, trades will have longer shelf-life.
Patience Is Key Here
There is good news. If I am correct that DAL stock will fade in the next few weeks, it’s only temporary. Dips are important so that the buyers can gather enough momentum to finally punch through and fill the gaps above. Breaking trough the resistance means it can finally target $50.
If investors are long the stock for the long-term recovery, then by all means they should stay in it. Investors seeking new swing trade positions should wait for cheaper prices soon. If they can’t wait they should take partial positions to manage the risk.
The best news about this is that Pfizer has restored the faith in an impending solution. I am looking forward to this so that our lives can return to what they were before. I hope that the “new normal” would be as close to the old normal as possible. In the meantime, airlines stocks will have extra costs in order to deal with virus protocols.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
