Delta Air Burns Cash and Faces Cost Cuts - How to Trade the Stock

Buy Delta on weakness to its projected weekly value level for next week at $13.75. Reduce holdings on strength to its monthly risky level at $33.40.
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Delta Air Lines  (DAL) - Get Report is burning $50 million a day so cost cutting is a must. 

Delta’s fleet of Boeing 777 planes has been grounded. The Atlanta carrier has been inundated by $1.2 billion in refunds. And it has 7,000 too many pilots. For more information read the details as compiled by TheStreet.com.

On Thursday the stock traded to a seven-year low $17.51. On the weekly chart the shares are becoming too cheap to ignore.

The stock opened Thursday at $18.80 and traded as low as $17.51. It’s down 68% year to date and is deep into bear-market territory 70% below its 2020 high of $63.48 set on Jan. 17.

Delta was cruising along its 200-day simple moving average on its daily chart, but began to lose altitude quickly on Feb. 24. 

On March 5 a death cross formed, which indicated that lower prices would follow.

The stock also has gained altitude since Dec. 12, 2012, tracking its 200-week simple moving average. 

This reversion to the mean failed to hold during the week of March 13. 

The positive I see is that its weekly stochastic reading is a week away from showing that the stock has become too cheap to ignore,

The stock has a p/e multiple of just 3.6 and Delta does not offer a dividend, according to Macrotrends. 

The airline beat earnings-per-share estimates in 11 consecutive quarters. Its latest report showed a loss that was narrower than expected.

The daily and weekly charts will show how difficult it is to catch a falling knife.

The Daily Chart for Delta Air Lines

Daily Chart for Delta

Daily Chart for Delta

Courtesy of Refinitiv XENITH

The daily chart for Delta shows the stock in flight tracking the 200-day simple moving average (green line) until Feb. 24.

The death cross confirmed on March 5 occurred when the 50-day simple moving average declined below the 200-day SMA, which is a sell signal.

The horizontal lines from top to bottom are the semiannual, quarterly, and monthly risky levels at $53.42, $42.70, and $33.40, respectively.

The Weekly Chart for Delta Air Lines 

Weekly Chart for Delta

Weekly Chart for Delta

Courtesy of Refinitiv XENITH

The weekly chart for Delta is negative but oversold, with the stock below its five-week modified moving average of $26.26.

The stock is well below its 200-week simple moving average, or reversion to the mean, at $50.71. 

Note that this average provided buying opportunities during the weeks of Dec. 14, 2012, July 8, 2016, and Jan. 4, 2019.

The 12x3x3 weekly slow stochastic reading is projected to fall to 10.55 this week from 11.77 on May 8.

Once this reading falls below 10, which is likely next week, the stock will become technically too cheap to ignore. 

The weekly value level for next week should be around $13.75.

Trading Strategy: Buy Delta on weakness to its projected weekly value level for next week at $13.75. Reduce holdings on strength to its monthly risky level at $33.40.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019 were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Second quarter 2020 levels were set established based upon the March 31 closes. The monthly level for May was based upon the close on April 30.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.