BALTIMORE (Stockpickr) -- With plummeting fuel prices still grabbing headlines, it's not hard to see why airlines and airline-related stocks have been in rally mode lately. In the last six months, the NYSE Arca Airline Index has ratcheted 26.5% higher, beating the rest of the market by more than 20%.
But that's only part of the story. As low oil prices persist and the negative effects of big crude oil hedges fall off airlines' income statements, these stocks could be in store for even more upside in 2015. Buying pressure is building in these high-fliers, and that's something that's becoming evident on the charts. A handful of airline stocks look ready to break out here.
Today, we'll turn to the charts for a technical look at four airline-related stocks to buy -- and one to avoid at all costs.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, let's take a look at five technical setups worth trading now.
Up first is Southwest Airlines (LUV) - Get Report, a stock that's been the poster child for this airline rally lately. In the last six months, LUV is up more than 36%. But don't worry if you've missed the move up to now. Southwest could be ready to kick off a second leg higher in the new few trading sessions.
Since the end of January, LUV has been forming a textbook ascending triangle pattern, a bullish price setup that's identified by a horizontal resistance level above shares (in this case up at $46) and uptrending support to the downside. Basically, as LUV bounces in between those two technically significant price levels, it's been getting squeezed closer and closer to a breakout above our $46 price ceiling. When that happens, we've got our buy signal.
Relative Strength, down at the bottom of the Southwest Airlines chart, adds some extra evidence to the upside in this stock; it has been in an uptrend of its own for the last year. That uptrend in relative strength means that LUV is outperforming the rest of the market in good times and bad ones. As long as that relative strength uptrend remains intact, LUV should keep stomping the S&P.
Shares are testing a breakout above $46 this week. Wait for a meaningful close above that level before buying the breakout.
It's not just the airlines that are benefitting from the oil shift. Aircraft manufacturer Boeing (BA) - Get Report is showing us the exact same setup as LUV right now. Even though airlines have a big incentive to upgrade their fleets to significantly more efficient models when oil prices are high, record profits at Boeing's biggest customers are helping to drive orders even while oil costs remain depressed. Like LUV, Boeing is forming an ascending triangle. In this case, resistance at $156 is the price level to watch.
Why all of that significance at that $156 level? It all comes down to buyers and sellers. Price patterns, like this ascending triangle pattern in BA, are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Boeing's stock.
The $156 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $156 so significant. The move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Wait for shares to catch a bid above $156 before you buy Boeing.
American Airlines (AAL) - Get Report has been treading water recently. Since the calendar flipped to January, shares of this $38 billion air carrier have only gained 1.6% -- not a particularly compelling performance. But zoom out a bit and things look a whole lot more constructive in AAL; that sideways churn in shares is actually the setup that makes this stock tradable this week.
The sideways action in American Airlines is called a rectangle pattern. The rectangle pattern gets its name because the pattern basically "boxes in" shares between a pair of parallel support and resistance lines. For AAL, the levels to watch are resistance up at $55 and support at $47. It pays to be reactionary with this price chart. After all, rectangles are "if/then patterns": If American Airlines breaks out through resistance at $55, then traders have a buy signal. Otherwise, if the stock violates support at $47, then the high-probability trade is a sell.
Consolidation setups such as this one are common after big moves, and since AAL's prior trend was up before shares started chugging sideways, a breakout above $55 is the likely outcome. Still, it's important to wait for the breakout to happen before you play this trade. Buyers and sellers haven't figured out who's in charge yet. Just like with airline peer LUV, shares are testing their breakout level this week.
You don't need to be an expert technical trader to figure out what's going on in shares of discount carrier Spirit Airlines (SAVE) - Get Report. Since last fall, Spirit has been in an uptrending channel, bouncing its way higher on every test of the support line down at the bottom of the channel. In other words, SAVE has been a "buy the dips stock," and as shares dip again in March, we're coming up on another big buying opportunity.
The channel in SAVE is formed by a pair of parallel trend lines that identify the high-probability range for shares to stay stuck within. Each of the last five touches of that trend line has provided a low-risk, high-reward buying opportunity, so as SAVE moves back towards support, it makes sense to buy bounce number six.
Waiting for that bounce is important for two key reasons: It's the spot where shares have the furthest to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring SAVE can actually still catch a bid along that line before you put your money on shares.
Not all of the airline names we're looking at today are ready for takeoff. Last up on our list this week is Virgin America (VA) , the $1.4 billion discount airline that began operating in 2007 -- and then went public back in November of last year. Virgin is showing some cracks as it tests a major support level at $32.
Virgin is currently forming a head and shoulders top. You can spot the head and shoulders by looking for two swing highs that top out around the same level (the shoulders), separated by a bigger peak called the head; the sell signal comes on the breakdown below the pattern’s “neckline” level. That's our $32 level in Virgin America.
Our momentum gauge, 14-day RSI, adds another red flag to the topping-action in VA right now. Momentum has been trending lower since shares peaked in December, suggesting that selling pressure is building at the same time shares are lower than they've been in all but two sessions of trading. The violation of $32 support is the sell signal for Virgin America.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to
. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in
Investor's Business Daily
. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji.