Commercial air carriers are overbought after sizable post-election rallies and have reached major resistance levels that could support well-timed short sale positions. A crude oil rally after this week’s closely watched OPEC meeting may provide the catalyst for a reversal that drops these stocks 8% to 10% in the next one to three months. D.J Transportation Average has reached resistance as well, providing another tailwind for lower prices in this volatile sub-sector.
Hopes for stronger 2017 economic growth have underpinned the airplane group during November but a surging U.S. Dollar and broken trade agreements could lower international revenues, making profit objectives harder to reach. In addition, high complacency levels have dropped S&P Volatility Index (VIX) to the bottom of a multiyear range, raising odds for multi-week pullbacks across recently resurgent sectors that include the airlines.
U.S Global Jets ETF (JETS) offers a liquid way to play the short side, roughly matching performance by the venerable Amex Airline Index, which has no underlying fund. XAL closed two points below 2015 resistance on Friday while JETS exceeded the prior high by less than one point. That instrument has gained 17% without a pause or consolidation, setting off overbought signals that favor a reversal and deep retracement.
On Balance Volume (OBV) supports this bearish thesis, failing to reach the August 2014 or March 2016 high even though the fund is now trading at an all-time high. This bearish divergence predicts that aggressive sellers will return and trigger a test that could yield a failed breakout. There’s little support between the breakout at 26.72 and November 7th breakaway gap just above 24, making that level a logical downside target.
American Airlines Group Inc (AAL) has booked the weakest short term performance of the three major carriers, rallying off a two year low in June 2016 but failing to reach the 2015 bull market high above 55. It’s now trading just above the .618 Fibonacci selloff retracement and right at resistance generated by the November 2015 swing high. The first sign of a reversal will be a decline that generates a closing print below 45.
OBV paints a mixed picture, grinding sideways for 18-months while the current uptick has failed to reach the March or September 2016 highs. Daily, weekly and monthly Stochastics have hit overbought levels at the same time, predicting a reversal and decline that tests support in the upper 30s. Look for the daily indicator to turn south first, with two to seven days of bearish action needed for the weekly to trigger an intermediate sell signal.
Spirit Airlines Inc (SAVE) Latin American routes could hurt profits in coming years if a presidential attack on NAFTA builds hostility and resentment in that part of the world. Those potential headwinds haven’t undermined fourth quarter performance, at least so far, with the stock rising nearly 50% off the October low. Even so, it’s poorly positioned compared to its rivals, stuck just above the .386 selloff retracement.
OBV looks more bearish as well, filling out a basing pattern that started at the deep November 2015 low. It’s got a long way to go to restore institutional sponsorship, with that task made even harder by a rally that’s now reached resistance at the double top broken in August 2015 (red line). A reversal off that level could generate significant momentum, dropping the stock back to the blue trendline of rising lows near 40.
The Bottom Line
Airline carriers have reached major resistance at the same time that overbought technicals are predicting a sizable reversal. Inadequate accumulation during the November rally adds weight to that bearish prediction, suggesting the group will offer profitable short sales in coming weeks.
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