Here’s How To Trade American Airlines Stock as It Breaches Support

The ghost of crashes past came to haunt investors as they rang in the new year. It was as surprising as it was sudden and acted as a much-needed reminder that stocks go both up and down. Airline stocks were among the hardest hit, and while the broader market rebounded into the close, the likes of American Airlines (NASDAQ:AAL) did not. In light of volatility’s return, we’re taking a fresh look at AAL stock and why it’s now a tough buy.

An American Airlines (AAL) airplane waiting on the tarmac. Represents airline stocks.
Source: GagliardiPhotography /

For context, let’s first consider Monday’s stock spill and the accompanying spike in the CBOE Volatility Index (INDEXCBOE:VIX).

The S&P 500 index closed the session down 1.36%. It may not sound like much, but it’s one of the largest declines we’ve seen since the Presidential election. It’s also the first time the large-cap-laden index closed below its 20-day moving average.

The weakness was shared by the Russell 2000 Index, which was down more than 2% at its low point of the session. At the same time, fear returned in a big way to propel the VIX almost past 30 before the late-day stock rebound took the wind out its sails.

There’s always a chance this could be a one-off and we move quickly back to new highs. But, I’m willing to give sellers respect after such a high volume of distribution day strikes. This is especially true for those sectors or industries that were unable to bounce back by the closing bell. The relative weakness in airlines in general and American Airlines, in particular, should be of concern to shareholders.

Turbulence Strikes AAL Stock

Airline Index (XAL) forms lower pivot high
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

To set the stage for the AAL stock chart, consider first how the NYSE Arca Airline Index (INDEXNYSEGIS:XAL) fared on Jan. 4. Sellers swarmed from the get-go and didn’t let up all day long. Though it closed almost 1% off the lows, you wouldn’t know it by looking at the -5.17% daily change. Of all the major ETFs and indexes I track, this one was the worst by far.

Some of the blame lies with the broad market weighing on equities, sure, but again there was a gaping discrepancy between the S&P’s 1.36% slip and XAL’s bloodletting.

With the slashing, XAL formed a lower pivot high and is on the brink of forming a lower pivot low. The 20-day moving average is also rolling over to confirm sellers are wresting control of the short-term trend. I think this is an easy call. Airlines are bearish as long as the new pivot high at $84 stands.

AAL Stock Chart & Trade

American Airlines (AAL) stock with short-term support break
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

With the industry under pressure, American Airlines would have to be showing some serious relative strength to justify buying. As it turns out, however, its chart is just as much of a dog as XAL. While it only fell 4.06% on the day and can argue outperformance, it’s a hollow victory.

AAL stock sliced through support and now has a pair of lower pivot highs and lows. While the uptick in volume wasn’t as excessive as with others, it increased and thus qualified Monday’s session as a distribution day.

The first takeaway for me is that aggressive bullish trades are off the table. The technicals don’t support any optimism. On the flip side, the primary problem I see with going bearish are the multiple support zones looming close. The top-end of the months’ long base formed after the March crash was $14. And I suspect buyers will be swift to defend a retest. That doesn’t leave much room for bears to score profits.

My preferred play is to wait for AAL to get more oversold, then sell naked puts near the $10 or $11 strike for February. Barring a complete meltdown over the next six weeks, these short puts should pay.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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