Southwest Airlines Co. (LUV) stock has bounced off its May 14 six-year low, in reaction to the improving bookings, triggering a wave of subsidence of the calls, but now is a good time to take exposure in the damaged part of the air transport sector? The answer depends on the time and your stomach acids because the new controlling shareholders are likely to suffer through sleepless nights until the threat of a second pandemic wave passes through the spring of 2021.
The short-term increase has now reached the 50-day exponential moving average (EMA) in the low $30s, which was broken on heavy volume in February. In turn, it is a perfect place to watch the bull/bear conflict, research of the relative strength of the indices that could predict future price action. A volume with a slight increase in small groups, and here might be instructive, setting off buy signals for bottom fishermen, while the reverse could easily reach the March lows.
In spite of the increase in bookings, the company still plans to May 2020 the revenues of the fall of 85% to 90% a year and the bookings are down between 60% and 70%. This marks an improvement compared to before guidance, but it is not enough to stop the red ink, because thin margins and years share buybacks have weakened the carrier’s balance sheet. Legendary investor Warren Buffet has taken note of the inadequacy of the sale of the airline holdings, including its south-west actions.
LUV’s Long-Term Chart (1991 – 2020)
In 1991 a breakout above six years of resistance to a split-adjusted $1.37 attracted the interest of the buyers, the establishment of an uptrend, which has stalled at $7.72 in 1994. The stock cleared that hurdle in 1998, by dividing by three times in the month of January 2001 up to $23.34. Who has scored the highest for the next 13 years, before a steady, but shallow decline that held support near $11 down during the economic collapse of 2008.
The sell-off found support on a 12-year low in the depths of the unique figures of the first quarter of 2009, finally ending eight years of bullish trend. The subsequent reversal of the wave blocked in the lower part of the adolescence in 2010, which gives a success of the year 2011 retest that has completed a bullish double bottom reversal. The stock broke out above 12-year trend line of lower highs less than two years later, on entering the fort of the advance so far this century.
The rally reached the 2001 high in 2014, which gives an immediate breakout that eventually stalled in the mid – $40 in 2015. The correction is finished in a sweet escape after the presidential election of 2016, lifting the stock to a record high of $66.99 in December 2017. The price action tempered in a trading range in 2018, the holding support in the $40 until February 2020 breakdown stretched into a six-year low in the bottom of $20.
The May overthrow, took place on the summit of 2001, successfully defending the support of 2013, the escape in the middle of$20. The decline has also transported through the 200-month EMA at the .618 Fibonacci rally retracement level before go up the level, confirming the higher support near $30. Taken together, it is likely that the stock has reached the bottom of the barrel, but a long basing period will be necessary before entering a new bullish trend.
LUV the Short-Term Chart (2017 – 2020)
Fibonacci grids stretched on the long-term downward trend from 2017 to 2020 and in the short term the downward trend between February and May 2020 are closely aligned with the declining 200-day EMA near $44 and broke 2018 low, marking an obstacle which is not likely to get mounted on a first attempt. The stock, it will be necessary to establish support at the 50-day EMA before you get to the barrier, and there is no guarantee that this will be a success. However, relative strength is now turning in the bulls favor, increasing the chances for a potential rise in the high level of resistance.
The balance volume (OBV), the accumulation-distribution indicator garnished with prices in 2016 and has reached a three-year low in April 2020. A 28 April secondary offering of 55 million shares and has generated a massive purchase of spike, lifting OBV at an all-time high. However, this activity has increased the float by around 10%, the dilution of the value of the shares previously held, so the rise may not be predictive.
The Bottom Line
The technical evidence raises the chances that Southwest Airlines has hit the bottom, but the stock could depreciate the main reference points by a wide margin, in 2021.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.