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This is the second in a three-part series on transportation stocks. Be sure to read the first installment, which covered truckers, rail stocks and delivery companies.

United Airlines

( UAUA) released a dazzling set of animated commercials during the Olympic games, highlighting the many wonders of world travel. It's a shame that

all I could think about

while watching those visual delights were the rotten experiences I had with the carrier while living in Denver, one of its main hubs.

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My mixed feelings highlight the deep disconnect between the awe of modern air travel and the reality of an industry that's taken all the enjoyment out of leaving home. Of course, the discomfort we feel when headed to the airport isn't just the fault of the airlines. We can also blame modern terrorism and crushing jet fuel costs.

Indeed, it's been a tough go for the industry since the start of the new millennium. The 2000-to-2002 bear market obliterated the sector, with a number of major players forced to declare bankruptcy and reorganize operations. Then, after a wave of consolidation and new stock offerings, energy prices ticked higher and then took off for the stratosphere.

Amex Airline Index (XAL)

Click here for larger image.

Source: eSignal

The Amex Airline Index (XAL) shows the sector peaking in 1998 and carving out a nearly perfect descending triangle that was broken to the downside after the terrorist attack in September 2001. The index bottomed out with the broad market in 2002 and began a recovery that stalled out one year later after retracing just 20% of the prior decline.

For the next five years, the index limped along in the trading range defined by the feeble bounce off the 2002 low. It finally broke down in March of this year, losing another 50% of its diminished value before bouncing in July. Price action since that time has carried the instrument back to resistance generated by the broken multiyear low.

Downward pressure in the last few weeks indicates that short-sellers are returning in force and trying to establish another down leg in the industry's continued destruction. The outcome of this particular battle isn't clear right now, but bulls have failed every opportunity to regain control in the last five years, so the outlook is guarded at best.

As you may have noticed, the majority of airline stocks trade against daily fluctuations in crude oil prices. Besides all the fundamental issues triggered by staggering fuel costs, many hedge funds have initiated aggressive basket strategies that keep them long one instrument and short the other instrument 100% of the time.

With the energy markets falling sharply in the last six weeks, the air carrier group seems to have weathered that stiff headwind, but a $30 pullback in crude oil won't be enough to save the battered industry. Add in the recession and growing popularity of virtual meeting space on the Net -- taken together, it's unlikely that most airlines will avoid bankruptcy.

United Airlines (UAUA)

Click here for larger image.

Source: eSignal

United Airlines returned to public life in 2006 after a chaotic bankruptcy period. The stock rose about 10 points in the following year, topping out in the low $50s. Its current troubles began in October, when price entered a steep dive that shaved 95% off its value in just nine months.

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The post-July bounce looks impressive, with price rising 500% in six weeks. Clearly, short-sellers are getting squeezed, and bottom-fishers are lining up to take advantage of the turnaround. But the recovery isn't nearly as strong as you might think. For one, the stock is still trading well below resistance at the 200-day moving average.

So far at least, the uptick is little more than an oversold bounce after a relentless decline. From a technical view, it's a standard-deviation event, in which price fell too far and too fast, setting up a lopsided reversion to the mean. That mechanism has now played out, favoring a sideways consolidation followed by another attempt to break the low.

Fortunately, things look a little better at the regional airlines. A handful of these smaller carriers have strategic advantages, such as little or no competition, keeping their seats full while they introduce aggressive fare hikes. A case in point:

Hawaiian Airlines

(HA) - Get Hawaiian Holdings, Inc. Report

, which is benefiting from the dissolution of it two biggest rivals earlier this year.

Hawaiian Airlines (HA)

Click here for larger image.

Source: eSignal

The carrier rallied to a new high at $8.75 in 2004 and pulled back. It spent the next three years basing between $2.50 and $5.50 before entering a strong recovery period in March. That uptrend lifted price back to the high in May, when sellers returned in force and triggered a reversal. The stock bounced once again in July and surged to an all-time high.

Momentum has faded badly in the last two weeks, with price grinding through a trading range between $7.50 and $10. But this price action looks like a healthy consolidation ahead of a renewed uptick that finally carries the stock into double digits. That event would also signal a multiyear cup-and-handle breakout.

To sum things up, the airline industry is a troubled one, but long-side opportunities do exist. If you must add exposure to the group, stick with regional carriers that show strong balance sheets and a more competitive profile. Alternatively, avoid bottom-picking in the major carriers, because those beaten-down companies still haven't posted their final lows.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Hawaiian Airlines to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.

At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Farley is also the author of

The Daily Swing Trade

, a premium product that outlines his charts and analysis. Farley has also been featured in





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. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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