Airlines Will Keep Losing Altitude

Compared to most other sectors, airlines have held up remarkably well this week. United Continental Holdings (UAL), Delta Airlines (DAL), and American Airlines (AAL) have lost little ground, possibly due to the influence of falling energy prices.

While some of these names are undoubted receiving a tail wind from lower energy costs, I wouldn't bet on the airlines taking off from here. In fact, I'd use the current relative strength in this sector to lighten up or exit longs.

For one thing, the Crude Oil Continuous Contract (@CL) may be in the process of bottoming. On the daily chart, a support level is plainly visible near $80, which was a major low point in April (shaded yellow). Yesterday, the contract reached a low of $80.01 before bouncing sharply. The intraday reversal created a candlestick pattern called a hammer (arrow), which is considered very bullish after a sharp downward move. Early this morning, oil dipped below $80 briefly, and rebounded again.

Crude Oil Continuous Contract (@CL) ¿ Daily Chart

Source: TradeStation

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Also, crude oil reached its most oversold level in over two years yesterday, according to its relative strength indicator (RSI, shaded blue). The combination of the support level, the hammer pattern, and a deeply oversold RSI indicates that a rebound is now likely.

The crude oil chart reminds me of another key commodity that recently reached a major support level. The Gold Continuous Contract (@GC) bounced from an established support level on Oct. 6 (shaded yellow), and has been climbing steadily ever since. There is no rule that states oil must behave in a similar fashion, but the stars are aligned for a crude oil bounce.

Gold Continuous Contract (@GC) ¿ Daily Chart

Source: TradeStation

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This takes us back to the airlines, which are the beneficiaries of lower energy prices. Unfortunately, the current relative strength in this area could just be a temporary reprieve. For example, United Continental has formed a triple top on the weekly chart. The stock's moving average convergence-divergence indicator (MACD) flashed a sell signal recently (arrow).

United Continental (UAL)

Source: TradeStation

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The American Airlines daily chart looks even worse. The stock has broken down from a massive head and shoulders pattern, dating back to late last year. The rally of the past two days only brings AAL back to the neckline, creating a selling opportunity.

American Airlines (AAL)

Source: TradeStation

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Delta Airlines has yet to break down from a rounded top pattern, but could be the next to fall.

Delta Airlines (DAL)

Source: TradeStation

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It's too early to determine what impact the Ebola virus will have on the airlines, so there is no point in trying to quantify it. Suffice to say that, regardless of any one factor, I expect the airlines to continue losing altitude. 

At the time of publication, Ed Ponsi had no positions in any of the securities mentioned.