Publish date:

Short Trader: Continental Prepares to Descend

Rising oil prices, as well as a bearish pattern, are a drag on the airline stock.

With peak driving season just a few months away, oil prices are on the rise. Although this is good for the refiners, it's not so good for other industries like airlines.

As oil prices rise, aircraft operating costs soar. You think it hurts to fill up your Escalade? Imagine topping off the tank in a 747. The air travel business is competitive, and those costs cannot simply be passed along to the consumer. When folks buy airline tickets, they look for the best deal. Air travel is expensive, so dollars count.

So the bottom line is this -- rising oil prices are bad news for air travel.

Yesterday I heard from a reader, J.H., who wanted to know if I agreed with his interpretation of

TST Recommends

Continental Airlines

(CAL) - Get Report

. He believes the stock is just completing a bearish head-and-shoulders pattern.

As soon as I pulled up a chart (below), I could see what he was talking about. Let's take a look.

I've highlighted the left shoulder, which actually consists of two peaks at $45 a share.

The head is up at $52.50, and the right shoulder is back down at $45. On each pullback, the trough has bottomed at $40. That makes $40 the "neckline."

Using this pattern, we can establish a downside price target by taking the difference from the head and the neckline ($52.50 - $40 = $12.50), and subtracting that same amount from the neckline ($40 - $12.50 = $27.50). So a good short entry would be on a print below $38 -- say, $37.95.

Continental Airlines (CAL) -- Daily

Once the short trade is opened, I suggest keeping a stop up around $42. As noted above, the price target is $27.50.

Shares of Continental closed at $38.27 Wednesday.

Updates on Previous Short Picks

  • CarMax (KMX) - Get Report: The entry for this short idea was $51.95, with a stop at $55.50. After falling as low as $48.49, the stock has snapped back, and shares closed at $52.48 Wednesday. Last Friday, investment bank Credit Suisse issued a $55 price target on the stock. But with the kind of market we're in now, I'd be surprised if that target was hit. So I'd say to leave the stop where it is.
  • Microsoft (MSFT) - Get Report: The short entry for this pick was $29.20, with an adjusted buy-stop at $29.50. I'm no longer receiving emails from Microsoft bulls advising me that the new Vista operating system will take the stock to new highs, so perhaps they've given up on this one. Microsoft's 200-day moving average is down at $26.76, so we could see a bounce at that level. The price objective on this trade, though, is $26. I believe the stock is going to hit that target; we're close to completing the strongest six months of the year for the company, and I'm not anticipating any catalyst to bring buyers back into this stock just yet. Lower the buy-stop down to $28.65 to protect your trading capital. The stock closed at $27.61 Wednesday.
  • Netflix's (NFLX) - Get Report entry price was $23.50, with a very tight buy-stop at $24.01. This short trade continues to work, and I don't see the need to do much. Drop the buy-stop down to $23.50 to lock in a break-even trade as a worst-case scenario. Netflix shares closed at $21.18 Wednesday.
  • The short entry for NutriSystem (NTRI) - Get Report was $46.60 with an adjusted buy-stop at $47.75. Shares closed at $45.37 Wednesday, and there are no changes on this one.

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

Dan Fitzpatrick is the publisher of StockMarketMentor.com, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback;

click here

to send him an email.