Airline Stocks Fly Above Resistance on United Earnings

Airline stock returns have trailed the broader market year to date (YTD), mainly due to the ongoing grounding of The Boeing Company’s (BA) fourth-generation 737 aircraft – the 737 Max. The Federal Aviation Administration (FAA) prevented airlines from flying the popular jet in March after two fatal crashes, forcing thousands of canceled flights during the lucrative summer travel season.

Despite this challenge, earnings from United Airlines Holdings, Inc. (UAL) gave the sector a much needed lift after the Chicago-based airline reported that its second quarter (Q2) profit soared more than 50% from a year ago on strong travel demand. United’s better-than-expected earnings came only days after Delta Air Lines, Inc. (DAL) raised its 2019 profit outlook, noting increased demand for premium-class and corporate travel.

From a technical standpoint, the airline industry’s leading exchange-traded fund (ETF) – the U.S. Global Jets ETF (JETS) – broke above a crucial resistance level in Monday’s trading session that could trigger additional momentum-based buying. Traders who follow the sector should monitor Southwest Airlines Co. (LUV) and Alaska Air Group, Inc. (ALK), which also broke above significant resistance yesterday ahead of its Q2 earnings on July 25.

Taking off in 2015, the U.S. Global Jets ETF aims to track the performance of the U.S. Global Jets Index. The fund invests its $69.56 asset base in companies within the airline industry, which includes commercial airlines, aircraft manufacturers, and airports. Both United and Delta feature prominently in the ETF’s portfolio, with respective weightings of 12.53% and 12.76%. JETS has decent daily dollar volume liquidity of almost $1 million most days, although an average 0.20% spread may be too wide for scalping small intraday moves. A 0.50% dividend yield mostly offsets the fund’s 0.60% annual management fee. JETS has returned 12.30% YTD, underperforming the Dow Jones Transportation Average by 5.41% over the same period as of July 17, 2019.

The ETF’s share price has oscillated within a $2.50 range between February and July, offering several high-probability trading opportunities from clearly defined support and resistance levels. United’s better-than-expected earnings helped the ETF close convincingly above the trading range’s upper trendline at $31.50 in Tuesday’s trading session. The breakout may result in the price gaining more altitude and test the 52-week high at $33.21. Those who take a long position should protect their downside with a stop-loss order placed just beneath yesterday’s low at $31.32 in case momentum stalls. 

Dallas-based Southwest Airlines operates a passenger airline that provides scheduled air transportation services in the United States and nearby international markets using a fleet of 750 Boeing 737 aircraft. Investors will be eagerly awaiting the low-cost carrier’s Q2 earnings released before the opening bell on July 25, given the airline’s significant exposure to the troubled 737 Max jet. Almost 10% of Southwest’s available seat miles will come from the 737 Max in October 2019, according to research provided by Stifel Financial, per Business Insider. Analysts expect Q2 earnings per share (EPS) to come in at $1.35, representing a 7% year-over-year (YoY) increase from the year-ago reported figure. As of July 17, 2019, Southwest stock has a $28.94 billion market capitalization, issues a 1.38% dividend yield, and trades up 15.36% YTD.

Southwest shares surged higher in January but have leveled off since. In Tuesday trade, the price broke above the 200-day simple moving average (SMA) and a downtrend line extending back to late September 2018, indicating that further gains may be in store for the airline’s stock. Traders who enter at current levels should set a profit target near $58, where the price encounters overhead resistance from a horizontal line. Manage risk by setting a stop under this month’s low at $51.03.

With a market cap of $8.07 billion, Alaska Air provides passenger and cargo air transportation services in the western United States, Mexico, Canada, and Costa Rica. The airline, which pays a 2.21% dividend yield, differs from many of its competitors in that it doesn’t include any 737 Max jets in its fleet of approximately 300 aircraft. Analysts expect Alaska Air to report Q2 EPS of $2.09, up from $1.66 in the same quarter last year, when it releases earnings after the closing bell on July 25. The airline has a track record posting positive earnings surprises, having topped bottom-line estimates over the past four consecutive quarters. Alaska Air stock has gained 8.64% on the year, rising nearly 4% in the past month alone as of July 17, 2019.

The stock’s share price has formed an ascending triangle, typically a continuation pattern, over the past two months. Yesterday’s breakout above the pattern’s top trendline suggests that the bulls may want to catch a flight to the November swing high at $74.04. In another sign of upward momentum, the 50-day SMA sits poised to cross above the 200-day SMA – signaling a “golden cross.” Those who take a trade could set a stop either beneath the July 16 low at $63.30 or below the 200-day SMA for a little more wiggle room.