Trading Airline Stocks

March 12, 2018 12:00 PM
Chart Patterns

The U.S. tax overhaul bill may boost profits for many industries including technology, banks, telecoms and industrial companies. The centerpiece of the legislation is a reduction in the corporate income tax rate to 21% from the current 35%. Also, a key provision allows companies to bring back hundreds of billions of dollars in foreign profits at a lower rate than existing rates. 

The general consensus is that the tax bill may not lead to new jobs or higher wages as it was originally touted, but it may lead to corporate bonuses, share buybacks and dividends. The stock markets may see further upside on higher corporate profits, capital spending and economic growth. Many U.S. companies are planning how to spend a tax cut windfall. This spending may boost overall U.S. economic growth. 

Investing in Airlines 

The travel industry and airlines are set to be some of the biggest winners from tax reform. Airlines pay the full statutory tax rate and have very high capital expenditure requirements. Airline and travel industry executives are some of the most vocal advocates for changes to the U.S. tax code. 

The year 2018 may offer great reasons to invest in airline stocks. The higher demand for air travel increased capacity, stable market competition, a tax cut windfall and the projected uptrend of revenue-per-available-seat-mile (RASM) metric may help airlines to generate increased revenues and profits. 

There are few exchange-traded funds (ETF), which offer exposure to the airline industry. These are: 

• SPDR S&P Transportation ETF (XTN)

• iShares Transportation Average ETF (IYT)

• U.S. Global Jets ETF (JETS)

For pure airline plays, here is a list of U.S. airlines stocks and one index: 

• Alaska Air Group Inc. (ALK)

• United Continental Holdings Inc. (UAL)

• Delta Air Lines Inc. (DAL)

• Southwest Airlines Co. (LUV)

• Spirit Airlines Inc. (SAVE)

• American Airlines Group Inc. (AAL)

• SkyWest Inc. (SKYW)

• JetBlue Airways Corporation (JBLU)

• Hawaiian Holdings Inc. (HA)

• The ARCA Airline Index ($XAL)


Chart Patterns in Airlines Stocks

Elliott Wave Theory was developed by Ralph Elliott (1930) to forecast market price movements. The underlying theory behind Elliott Wave Theory is that markets move in waves in the direction of primary trends. The Elliott Wave Theory suggests that markets move in five action (impulsive) waves in the direction of the underlying trend-followed by three corrective (reaction) waves in the opposite direction. These patterns are repetitive in nature. Elliott Wave Theory is very subjective and there are many variations and other key aspects of these waves. Traders need to study them carefully to understand the inner workings of the pattern to trade successfully. 

Elliott Wave Pattern in $XAL

“Classic Elliott Wave” (page 66) shows a textbook 5-Wave Elliott pattern from 2009 in the Arca Airline Index ($XAL). As you can see the Arca Airline Index has had two large up moves followed by shorter corrections since 2009. The final wave higher has retraced some, but not enough to declare the move over. So, $XAL may be due for one further exhaustive move higher. 

Failed Head & Shoulders Pattern

Southwest Airlines Co. (LUV) was ranked as the most popular U.S. airline in 2017 with more than 105 million passengers. During 2017, Southwest was forming a Head & Shoulders pattern with a neckline at $51 (“LUVving this trade,” below). In mid-November 2017, the pattern was almost completed to trigger a sell signal below the neckline. The Head & Shoulders pattern is considered a failed pattern if price rises and closes above the right shoulder.

Failed patterns also offer great trading opportunities as they tend to move strongly in the failed direction. During the first week of December 2017, LUV prices closed above the right shoulder’s high of $59.89 to trigger a long trade.


Chart patterns in U.S. Airline Stocks

The best trades are the ones where you can point to both fundamental and technical reasons for taking a position. As mentioned above, airline stocks should be beneficiaries of the recent Federal corporate tax cut. The following four airline stocks also have compelling chart patterns to go along with that fundamental outlook (see “Four market flights,” below). 

JetBlue Airways Corp. (JBLU) is indicating a Symmetric Triangle Pattern on a weekly chart (see “Trading symmetric triangle patterns,” Modern Trader, April 2017). United Continental Holdings Inc. (UAL) is in the midst of an ABC Bullish Pattern on a weekly chart (see “Trading ABC Patterns,” Modern Trader, December 2016). American Airlines Group Inc. (AAL) is the in the midst of a shorter-term (daily) ABC Bullish Pattern.  SkyWest Inc. (SKYW) is indicating that it is in a weekly Parabolic Arc Pattern (see “Parabolic arc: What goes up...” Modern Trader, November 2016). 

These airline stocks all have actionable patterns that can be exploited for profit.   

About the Author

Suri Duddella