United Continental Holdings Inc. (UAL) and American Airlines Group Inc.(AAL) got downgraded by Credit Suisse on Wednesday morning, triggering 5% declines at the opening bell—while compounding months of weak action across the airline sector. The rating reduction, driven by the threat of lower revenues after the Brexit referendum, is likely to be matched by other analysts in coming weeks.
Political and economic shockwaves triggered by the exit vote have already taken a heavy toll on the earnings outlooks of U.S. companies with international exposure. The crisis suggests AAL, UAL and other airlines with exposure across the Atlantic will reward short sellers for many months to come. Of course, timing is everything with this classic market strategy, so let’s identify price levels that may offer the lowest risk entries.
UAL Weekly Chart (2013 – 2016)
UAL topped out above 51 in 2007 and sold off to 2.80 during the bear market. It finally returned to resistance in January 2014, dropping into a rounded correction that completed the last leg of a seven-year cup and handle pattern. The stock broke out in November 2014 and topped out two months later at an all-time high just below 75. The subsequent pullback carved a trading range between that high and the upper-40s, finally breaking down in January of this year.
A test of new resistance into April got sold, yielding aggressive selling pressure that’s dropped the stock to a two-year low. The decline has now reached support at the July 2014 swing low in the upper 30s. This also marks a 100% retracement of the last rally wave, signaling a broad top that should yield another strong bounce, perhaps testing broken support at the 200-week EMA, currently situated near 45.50.
The monthly stochastics oscillator has reached the oversold level for the first time since July 2015, raising the odds for a multi-week recovery wave that tests new resistance, while offering a low-risk short sale opportunity in the mid-40s. The short-term setup doesn’t work as a bounce trade, at least yet, because strong downside momentum may overshoot support before the price comes to a rest and turns higher.
AAL Weekly Chart (2013 – 2016)
AAL came to life in December 2013 as the newly merged U.S. Airways and bankrupt American Airlines. Some charting services use U.S. Airways stock history for consistency while this weekly view starts with the merger. On the continuous chart, the former entity topped out near 63 in December 2006 and sold off to 1.45 during the bear market. The subsequent recovery continued through the merger, with the stock topping out in March 2015 about seven points below last decade’s high.
The subsequent pullback carved a small double top that broke to the downside in May 2015, yielding months of sideways action, followed by a deep slide starting in April 2016. The decline broke the October 2014 low at 28.10 last month, with the stock finding support near 25 and bouncing in the post-Brexit recovery wave. That rally stalled near 30 last Friday, giving way to this morning’s steep decline.
The monthly Stochastics oscillator has reached the oversold level for the first time since July 2015, like its rival, predicting it will stabilize and enter an oversold bounce that tests new resistance. Although the selloff has broken the October 2014 low, the recovery wave could exceed that level and test stronger resistance in the low 30, offering a low-risk short sale opportunity, ahead of a decline that triggers another round of multiyear lows.
The Bottom Line
UAL, AAL, and other U.S.-based international airline carriers have entered downtrends, made worse by the Brexit vote’s perceived dampening effect on trade and travel. Sector leaders have hit long-term oversold readings, telling observant market players to wait for sizable bounces before entering new short sales.
U.S. Airlines Enter Bear Markets (UAL, AAL)
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