In 2014 and 2015, as the price of oil fell, most airline stocks soared as their operating costs fell dramatically and the industry’s profitability rose. Since the beginning of 2016, oil has jumped almost 35% and yet airline stocks are mostly down on the year. But one airline that has been able to remain profitable and grow revenue on a quarterly basis is Southwest Airlines (NYSE: LUV).
We will get back to the fundamental analysis on LUV stock later, but the first thing that caught my attention about the stock were the charts. On the daily chart we see that the stochastic readings just made a bullish crossover, but those events have seen mixed results over the last few years. As the stock was falling in December and January, several bullish crossovers in the stochastic readings occurred, but none of them were good signals. The signal at the beginning of February was a good one, and the most recent one in May was decent.
Something that should help this most recent signal be a good one is what we see happening on the weekly chart. We see two separate developments that make me think the stock is getting ready for another rally. The first thing I noticed was how the stock was sitting just above its 104-week moving average and how that trend line served as support at the end of January.
The second development comes from the oscillators. The weekly stochastic readings are at their third-lowest reading over the last 3 ½ years and they look as though they will reach oversold territory next week.
Look at how the stock has performed the last two times the stochastic readings reached oversold territory. In mid-2015 it jumped from the $32.50 area to over $50 in six months. Earlier this year when the stochastic readings hit oversold levels, the stock rallied from the $35 area to more than $47.50 in just over two months.
It is also worth noting that the 10-week RSI was right at 40 last week and looks like it is trying to move higher now. The RSI seems to be forming a trend of higher lows.
Turning our attention back to Southwest’s fundamental performance, in the most recent quarter the company saw year-over-year quarterly revenue growth of 9%. By contrast, competitors Delta Air Lines (NYSE: DAL) and American Airlines (NASDAQ: AAL) saw their revenue decline by 2% and 4%, respectively. The five-year revenue growth rate for Southwest is 18.5%.
Ordinarily I would recommend waiting for the weekly stochastic readings to make a bullish crossover, but with the 104-week moving average providing support, I feel the time to buy is now. I would look to buy LUV stock below the $41 level with an intermediate target of $48. I would use the $38 level as a stop-loss point on the trade, as that would break the recent low and the moving average.
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