Trade AAL Shares While the Experts Are in a Holding Pattern

In the past year we’ve had a few ah-ha moments. One of them involves challenging the traditional methods of investing. Experts for ages preached owning stocks, not trading them. Now everyone is a trader as the new breed settles in. Today, the goal is to share a trading opportunity for American Airlines (NASDAQ:AAL) stock. We do this while we also describe the long-term opportunity in details.

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

The reopening process is going well in the United States. Those who want the vaccine got it, and there’s plenty more for the rest.

I even dined indoors at a restaurant this week in southern California. This hasn’t happened in more than a year.

The economic reports suggest that the U.S. is booming from last year’s base. This is a knife that cuts both ways, because it will bring about the end of QE faster.

The airlines, on the other hand, are struggling on many fronts. Even though travel traffic exploded relative to 2020, it is still 30% below 2019. There’s a lot more to recover before they can call it business as usual.

In addition, American airlines reported difficulties finding labor. My wife flew this airline six times in the last two months. Every leg was late, canceled or half empty. I’m not certain we know the whole story behind closed doors. One thing is for sure, business is definitely not as usual.

AAL Stock Upside Opportunity

American Airlines (AAL) Stock Chart Showing Pivotal Zone
Source: Chart by TradingView

This is a problem now, but it’s the opportunity later. Most often when there’s room for improvement, there is upside potential in the equity. AAL stock is at the bottom end of a broad consolidation period. It spiked 40% in January, most likely in sympathy to the shenanigans on Reddit.

Since then, the bulls and bears have been fighting it out in a clear sideways channel. There is an effort this week to stabilize and build a base at $22 per share. This is important because it’s exactly the January high when it failed miserably. This clearly is a pivotal zone and it should provide support on the way down.

Investors who are seeking a swing trade have $5 of potential upside. However, if the goal is not to hold it for a long time, it’s best to set a stop loss level below $21. Technically, losing that would trigger a bearish pattern and invite more sellers. The next level of support is strong but $2 lower.

The Long and the Short

Long term, it is a viable thesis to expect more upside than downside in AAL stock. I personally would prefer not to engage in a full size investment because of extrinsic factors. The indices are breaking records again even when we know that the end of QE is closer now.

The Federal Reserve rhetoric clearly changed. They are no longer unanimous in wanting to ignore inflation. Almost all of them now acknowledge it, yet so far, the official word is that it’s transient. I worry that they are wrong and then the stock market will have a tizzy if I’m correct.

To be cautious, I would delay taking a full-size position now. For a long-term entry, there’s no harm of waiting out a few ticks. I called it a buy from lower levels, so I am being fair and consistent with my opinion. I even marked $23 as a resistance zone on the chart back then in early February.

If the swing trade unfolds, I expect resistance going into $24 per share. The biggest catalyst will come if the bulls are able to exceed $26 per share. That’s 16% higher than current price, but it would make for one fantastic trigger. The upside of that pattern could bring it back above the pandemic accident scene.

The recovery process is going well, but the business operation of AAL stock is not. Fans should acknowledge that and infuse a bit of doubt in their bullish thesis. We have never had conditions like these before, so nobody’s an expert. We should all be more humble than usual with our conviction. If I absolutely must buy shares today then I would rather sell puts 25% lower. This way I don’t need a rally to win, and I have a huge buffer just in case.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.


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