Airline Stocks - Longer Term Technical Analysis
Seeking Alpha Analyst Since 2008
Summary
- I've been watching the big airline stocks since the pandemic breakdown.
- Price and volume are equally important.
- I'm not offering a strong opinion on where these are headed either way, just trying to observe and see what the market is telling us right now.
- For sake of brevity I will stick to the big 3 US airlines: Delta, American, and United. These three all have in common long-haul international operations, a domestic hub and spoke model and legacy routes. I have excluded Southwest because their business model is a bit different.
- This will be a long term technical analysis.
I am using monthly charts with a five year time frame to detect longer term trends. All charts are from E*Trade.
The first stock I want to look at is Delta:
Delta 5 YEAR CHART
A few observations:
From 2017-2020 the stock was fairly flat, with a mild uptrend. From 2018-2020 you could have made nice money swing trading it, by buying it when it hit $50 and selling at $60. Then 2020 came along.
I'm a big believer in looking at volume for signs of accumulation/distribution.
The big institutional investors cannot just buy into a position in one trade. They have to slowly scale in. The only way to suss out what they're up to is look at volume.
We see huge volume in March, April and May as investors dumped airlines stocks like crazy during the initial phase of the pandemic. Followed by a nice green bar in June 2020 that initiated the rally from sub $30 to $50.
Notice however that after that big green volume bar in June 2021, volume was declining, while price rose. I have highlighted that above. I believe this is a sign that small time investors were the main buyers. (I did not buy Delta in this time period, but dumped a position during the initial breakdown in March 2020.) Also I have drawn a rather sloppy uptrend line, showing that the uptrend was broken sometime around mid 2021. Since then, Delta has been in a downtrend. Note the increasing volume in November, which indicates possible institutional selling. It is still too early to tell how December will play out. Volume usually drops during the week before Christmas through New Years.
Next let's take a look at American's chart:
American FIVE YEAR CHART
Things to note:
American was already in a long term downtrend prior to the pandemic, unlike Delta.
The huge volume spike in June 2020 was much larger. This was likely large institutional buying. Similar to Delta, though, we see that the rally failed. Or perhaps, it is correcting; however, note the double top around $26, which just coincidentally appears to be same price where AAL fell from during the first pandemic panic dump in March 2020. It seems the market has a memory!
I've drawn a flat line over the double top. That line is now firm overhead resistance, back in 2019 it acted as support.
I notice the stochastic are still declining and AAL is not yet oversold on a monthly chart. Similar also to Delta.
While I don't have a strong opinion on where AAL is headed, I don't like the looks of their chart. It seems just as likely that it will fall to test support around $12 as make another run at $26.
Finally let's look at United's monthly five-year chart:
United FIVE YEAR CHART
This chart appears to my eyes similar to Delta, except that the overall decline from pre-pandemic highs has been deeper. I haven't highlighted the declining volume since June of 2020 because it is obvious.
One thing I like about United's chart is it seems clear that the support line is around $40 and the resistance at $60. I am not bullish but there seems to be better defined risk/reward here, if you were to buy, and put a stop loss order at $40 which is about a 10% loss from the current price of $44. It is very important in my opinion if you are a long term investor to have stop-loss orders. Once you are down more than 10%, losses can quickly become out of hand. Selling at $60 would be around a 30% gain which is a decent risk-reward.
CONCLUSIONS:
With the help of hindsight and looking at volume, as well as price, it is clear now that the 2021 rally in US major airline stocks was going to fail. The decline in volume while price rose tells us that it was probably small time investors getting fleeced.
The stochastic and the MACD look like the selling may not be over just yet, on a time scale of the next several months. In the shorter term these stocks could continue to rally back towards resistance.
Where they go from there is anyone's guess, but my best guess is they need a long period of "basing" to work off the overbought condition from 2021, and now is not the best time to buy for longer term investors, with the possible exception of United. I would not recommend to short them here either except for a very short term trade, or should they get back to price levels of summer 2021.
Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.
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