The airline sector is losing altitude at a rapid pace, and it could become the first great short sale idea of 2011. As in past downturns, the major carriers look more far vulnerable than the regionals, which have undergone rapid consolidation. This has negative implications for the Dow Jones Transportation Average (DJT), which has been leading the broad market higher for many months now.

Rising crude oil prices and a limp economic environment have caused this tailspin, having followed a strong recovery period that culminated in the United Airlines-Continental Airlines merger in September. Most of the group has failed to participate in the year-end rally -- and, at the same time, crude oil is testing its two-year high near $90 per barrel.

Adding insult to injury, crude oil is in a perfect position to rally into triple digits if worldwide industrial demand picks up in early 2011, which is likely. That would have mixed consequences for the airlines: While higher jet fuel will lower profitability even further, the demand should translate into somewhat higher levels of business travel.

Of course, the airlines live and breathe through their business travelers -- these customers use air services more frequently, and at a higher average cost per trip. While a stronger economy should increase overall load factors, the airlines also face a huge threat from a growing catalogue of high-tech alternatives, such as the video conferencing featured in Cisco's ( CSCO) wide-eyed Ellen Page ads.

Penny-pinching by businesses worldwide since the 2008 market crash has transformed video conferencing from an interesting idea into an indispensible cost-cutting methodology. Now that businesses know they can conduct their collaboration and education without sending a few dozen employees to a Las Vegas or New York hotel, they're less likely to do so in the future.

To be truthful, the airlines have responded well to economic challenges in recent years, achieving lowered labor costs, hedging fuel prices and establishing myriad fees for bags and early check-in privileges. But they still face an uncertain future in which customer bases, both business and leisure, will find ways to reach destinations, physical or virtual, using newer and cheaper methods.

Let's review technical positioning on the major carriers and see which ones are best situated for lower prices in 2011.

United Continental (UAL) -- Daily
Source: eSignal

United Continental ( UAL - Get Report) dropped into a holding pattern in the second and third quarters while it awaited government and shareholder merger approval. The marriage triggered a solid breakout and rally up to $29.75 in October, which marks the yearly high. The stock has traded poorly since that time, having undergone a six-week consolidation followed by a breakdown last week.

The decline cut through 50-day moving average support near $27.30, and the price has been unable to push back above that level in the last six sessions. Of course, the major averages hit new 2010 highs in the same time frame, adding bearish power to the current downtrend. A breakdown through the 200-day moving average, currently near $22, will issue a strong short sale signal.

AMR (AMR) -- Daily
Source: eSignal

American Airlines parent AMR ( AMR - Get Report) has underperformed its key rivals in recent years, making it more even vulnerable to a broad sector downturn. It topped out at $10.50 in March of this year and then dropped under $6 during the mid-year correction. The subsequent recovery stalled well under the March high, with the price rolling over and dropping into the 50-day moving average last week.

The stock is trading just 40 cents from its 200-day moving average at $7.40. As with United Continental, a violation of that support level will issue a notable sell signal. However, I'm even more focused on the summer lows near $5.90 (red line in the chart above), because a breakdown could expose the stock to a virulent decline that eventually tests the bear-market low at $2.40.

Delta Air Lines (DAL) -- Daily
Source: eSignal

Delta Air Lines ( DAL - Get Report) topped out at $14.94 in April after a strong recovery that had lifted the stock price to a two-year high. It struggled through the summer, breaking the 200-day moving average and dropping into single digits. The uptrend that started in late August was strong compared to that of its peers, lifting Delta Air Lines back to within 50 cents of the recovery high (red line) in early November.

The stock has been pulling back since that time and is now testing range support, as well as the 50-day moving average. The relatively shallow decline in the last month gives this pattern a more bullish look than United Continental or AMR, because an uptick back to the high would finish the last leg of cup-and-handle breakout pattern. As a result, I'm neutral on this one for now, and I might even be persuaded to go long if it breaks out.

U.S. Airways (LCC) -- Daily
Source: eSignal

Given that U.S. Airways ( LCC) is headquartered just three miles up the road, here in Tempe, Ariz., I'll try to be kind to it. No, I wasn't real pleased when America West, our local carrier, tied the knot with U.S. Airways, because they had a bad reputation. However, the merged operation has done quite well, and it's currently the strongest-performing major air carrier.

Still, cracks are starting to appear in the bullish armor. The stock returned to November 2008 resistance at $11.24 in June of this year, ground sideways for five months and broke out in October. The uptrend stalled immediately, with the price rolling over and testing support. A selloff through $10.50 would break the double-top (red line) and signal a false breakout that may precede a persistent decline.

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

Alan Farley is a private trader and publisher of Hard Right Edge, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of The Daily Swing Trade, a premium product from TheStreet.com that outlines his charts and analysis. Farley has also been featured in Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. He has written two books: The Master Swing Trader and The Master Swing Trader Toolkit: The Market Survival Guide, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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