- Southwest Airlines (LUV) shares surged 7.5% on Wednesday on above-average volume.
- The airline heavyweight rode the coattails of Delta Air Line’s (DAL) earnings announcement.
- If LUV stock can breach the 200-day moving average, it’s a buy.
Airline stocks peppered the leaderboard on Wednesday, with major carriers from Southwest Airlines (NYSE:LUV) and Delta Airlines (NYSE:DAL) to American Airlines Group (NASDAQ:AAL) and United Airlines (NASDAQ:UAL) all gaining over 5%. The sharp rally came on the heels of a well-received earnings announcement from Delta. Virtually every one of their price charts is pointing toward more upside. But I think LUV stock offers the cleanest trade setup.
Let’s take a brief look at why the market liked Delta’s earnings so much. Then we’ll break down the LUV chart and build out two ways to profit.
Upbeat Delta Earnings Are a Lifeline for LUV Stock
Airline stocks haven’t given much reason for optimism over the past year. The best thing I can say about the entire group is that they turned neutral for a few months. With so many hot trends in energy, commodities and defensive sectors, most traders have ignored LUV and friends altogether. When an industry becomes as unloved as this, it usually takes a fundamental catalyst to bring buyers back.
And Delta earnings may have just created the spark.
Despite reporting a loss for the quarter, the company painted a rosy picture for travel demand moving forward. “Over the last five weeks, we’ve experienced the highest level of sales and booking activity at any time in our history,” Delta CEO Ed Bastian said. “I think it’s going to be a very, very strong summer travel period for us going forward.” As a result, the company is expected to swing to a profit next quarter. Its revenue recovery should top 93% to 97% of where it was before the pandemic.
The optimistic outlook brought buyers rushing into airline stocks across the board, even though most have yet to report their own earnings.
The LUV Stock Chart Is Itching for a Breakout
Since November, Southwest has been stuck in a sloppy range, giving directional traders little to work with. In situations like this, the best two options are to buy when support forms at the low-end of the range or buy when prices finally pierce resistance. Both setups create lower-risk entries. With Wednesday’s jump, LUV stock is testing the top-end of its box, and an upside breakout seems imminent. At the same time, the 200-day moving average is barreling down and provides further significance to the eventual push above $47.
If we look to 2021, the looming breakout brings on further significance. $47 was a major support zone that halted multiple selloffs through the back half of last year. As the principle of polarity suggests, this old floor turned into a new ceiling once we fell below it in November. If buyers press their advantage, $55 is a logical target over the coming months.
Pick Your Probability
If you want a more exotic way to play than purchasing shares outright, the options market provides plenty of choices. Ultimately, it depends on whether you prefer a higher probability of success or a higher payout. I’ll pitch my favorite idea for each.
Higher Probability Trade: Sell the May $40 put for 60 cents.
Consider this a bet that LUV stock stays above $40 for the next month. The market is pricing in an 85% chance of success. Your max gain is the 60 cents received.
Higher Payout Trade: Buy the May $47.50/$50 bull call spread for 90 cents.
You’re risking 90 cents to make $1.60 if LUV rises to $50. That translates to a potential return of 178%. The options board is pricing in a 30% chance of capturing the max gain.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.