Since late 2009 it’s been blue skies ahead for the Airlines as the group has advanced over 600%. They have cashed in good earnings due to several factors such as lower fuel prices, baggage charges and increased seating capacity just to name a few. However, the group has seen a brisk sell-off over the past few weeks. So, are we going to witness a crash landing or is this a slight decent avoiding some near term turbulence before the group elevates back toward new high territory? Let’s take a look at a few charts to get a better picture beginning with a longer term weekly chart of the sector index dating back around eight years highlighting the huge advance. One of the main things that stick out here is the noticeable decrease in volume the week of 7/7 as the index makes a new high. While this alone is not a sell signal, it should at least get your attention and warrant some caution.
Now we will zoom in a bit on a shorter term daily chart which clearly shows six straight days off selling on increasing volume immediately after we made a new high. This action also took the index right through its 50 day Exponential Moving Average. These are two additional factors that should have gotten our attention.
Now lets take a look at the charts of three major carriers beginning with United (UAL). After reporting earnings after the market close on 7/18, the stock gapped lower the following morning and it’s been downhill ever since. Volume was extremely heavy that day as it traded over 15 million shares, more than three times normal activity. Volume remained comparatively heavy over the next several trading sessions with the stock closing very near the days low each day. Additionally, we notice that our 10, 20 and 30 day moving averages are crossing over hinting of a possible change in trend. Finally, similar to the Airline Index itself, UAL made new highs on 6/2 on much lower than average volume. All things being equal, stocks should see an increase in trading volume at new price highs, this was a red flag.
Now on to Southwest (LUV). Here we can also see an initial push lower from new highs under fairly heavy selling pressure. This sell-off is a bit more orderly that that of UAL however, its lasted nearly a week longer and it also has traded though its 50 day EMA. Additionally, like UAL, we can see the beginning of a possible crossover in the moving averages signaling possible trend change. We also take note of the very weak volume on 7/7 as Southwest notched a new high.
Lastly, let’s take a peek at Delta (DAL) and the picture here isn’t much better. We can see a move down similar to that of LUV. An initial thrust lower accompanied by heavy volume and a breaking of the 50 day EMA. Here, we can also see that the previous breakout level of around $52.00 has been unable, at this point, to serve as support on the way back down.
In summary, while these stocks may possibly set up as short sales in the near future, we want to limit our short exposure as we are in the midst of an up trending market. That said, good short set ups can and do present themselves in bull markets evidenced this year by many retail and energy sector stocks and the airlines look primed to possibly join in. Whether or not you decide to take on shorts, it always pays to see the markets from both sides so we can stay sharp and be prepared to recognize any possible changes in market character.