Stocks for the Oil-Airline Dynamic
The relative difference between the CBOE Oil Index (OIX) and Amex Airline Index (XAL) should have some degree of indirect correlation, and that relationship, considering the experienced hedging practices by the industry, should be smoothed out of time. Often that is not the case, and the charts of the OIX and the XAL show a number of periods when that implication breaks down.
The graph at the bottom of the price chart is the correlation coefficient indicator, which reflects the degree of correlation between the two indices over 20 chart periods. Between August and December of last year, the reading was over 75, indicating a direct correlation between the price of oil and performance in the airline sector. Since then, the relationship has vacillated.
OIX and XAL
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The blue arrows on the chart mark periods of normal inverse correlation, when the indices move in opposition. Currently they are in one of those periods, but each is at a key inflection point. The XAL is testing its 50-day moving average and a one-month uptrend line, while the OIX has broken its mirror-image support level and bounced off its 200-day moving average. There are, of course, four potential ways for the relationship to resolve, and I have two stocks that are tradable candidates, depending on the outcome.
The first is Alaska Air Group (ALK) which, like the XAL, is testing a resistance level and its 50-day moving average, with a solid area of support between the 200-day moving average and the $34.75 level. The Williams %R indicator, similar to Fast Stochastics, is moving out of an oversold condition, and the faster money-flow indicators are showing some slight improvement.
ALK Weekly
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The chart of Occidental Petroleum (OXY) shows a significant decline over the last month, like the XAL, after failing to make a new high in February and breaking below its 50-day moving average. It is testing its 200-day moving average this week.
OXY Weekly
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If the current indirect correlation continues to hold, ALK will break out, and OXY will fail to hold its 200-day average. There are, as I said, other potential variations, but both charts provide clear levels of support and resistance to play the alternative resolutions. Keep stops tight and preserve your capital.
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At the time of publication, Moreno had no positions in stocks mentioned.