Stocks sagged into the close on Monday, which after last week's gains is not surprising. The market internals were positive even though most of the major averages closed with slight losses. The exception was the iShares Transportation ETF (IYT) as it was down 1.93% on the day.
This will give the market bears some more ammo, but as I noted on Friday, keeping investors on edge stops the market from getting overbought too quickly and helps keep the rally intact. The next concern on the horizon is the start of earnings season that officially kicks off on April 8.
The weakness in the transportation stocks could be in reaction to the firming oil prices as crude oil is almost $5 above last Monday's lows. For the past month, I have been recommending that investors use the correction to buy (Hope You Patiently Bought the Dip). Given the new highs in the NYSE A/D line, I think this is still the correct strategy.
However, corrections are often quite complex and the weakness in the airline stocks Monday suggests that their correction is not yet complete. The charts indicate that you should make a slight change in our strategy.
Click to Enlarge
- The daily chart shows that an LCD sell signal was triggered with Monday's close.
- This is a short-term negative, suggesting that it could pullback to the 258 area, which is about 2% below Monday's close.
- The upside targets from the flag formation and the 127.2% Fibonacci retracement targets are in the 286-290 area.
- The former downtrend and daily starc- band are in the 252 area.
- The relative performance does appear to have completed its correction as it rallied from support, line c, and moved above its previous high.
- The volume was very heavy last Friday.
- The daily OBV overcame its resistance (line d) on March 13 and looks very strong.
United Continental Holdings (UAL) has had a weaker rally from the lows as it formed a doji at monthly pivot resistance ($70.35) last week.
- A LCD sell signal was triggered on Monday as UAL closed back below its flat 20-day EMA.
- There is next support at $66.50-$67 with more important at $64.50, line e.
- The daily relative performance has only rallied weakly and dropped Monday below its WMA.
- A drop below RS line support at line f, would be a sign of further weakness.
- The daily OBV just made it slightly above its WMA on the recent rally.
- The downtrend, line g, was tested before the OBV turned lower.
- The OBV shows a pattern of lower highs, line h, which is not a sign of strength.
- UAL needs a close back above $71.40 to turn positive.
Click to Enlarge
Alaska Air Group (ALK) has had a much more impressive rally from the recent lows at $63.40.
- With Monday's close, ALK had gained 6.4% as the daily starc+ band was tested last week.
- The early March high and the 20-day EMA are at $66.35.
- The daily starc- band is at $65.27 with the monthly pivot at $64.20.
- The daily RS line has turned lower and is now testing its rising WMA and support at line b.
- The daily OBV decisively broke its bearish divergence resistance, line c, on March 10.
- The weekly OBV (not shown) is above its WMA.
- A daily close above $69.42 will reassert the uptrend.
American Airlines Group (AAL) had a very sharp rally after breaking its downtrend, line e, last Monday.
- The daily starc+ band has been tested over the past three days with the weekly at $58.83.
- There is first good support now in the $52.30-$52.50 area.
- There is more important support at the sharply rising 20-day EMA at $51.47.
- The daily RS line bottomed out in early March (line g) and turned positive when resistance at line f, was overcome.
- The volume has been very strong on the rally as it surged through the resistance at line h.
- The weekly OBV (not shown) has already made a new high.
What it Means: The short-term action of the airline industry group and these three stocks makes a pullback likely over the near term. United Continental Holdings (UAL) does the look the weakest and it looks the most vulnerable.
How to Profit: ForAmerican Airlines Group (AAL) go 50% long at $52.48 and 50% long at $51.62 with a stop at $49.23 (risk of approx. 5.4%).
For Alaska Air Group (ALK) go 50% long at $66.37 or better and 50% long at $65.51 with a stop at $63.18 (risk of approx. 4.2%).
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.