When the new version of American Airlines (NASDAQ: AAL) was first introduced to investors in December 2013, the stock was pretty well received. The price of the stock promptly moved higher, only going down in two of the first 13 weeks of trading.
The stock gained 90% during the first seven months of trading before suffering its first sizable setback last summer. But with the price of oil falling so sharply over the last nine months, the stock was able to bounce right back. It doubled in price from the October low through the middle of January, when the stock peaked at $56.09, just ahead of the company’s first quarter earnings report.
After the earnings report, the stock slipped down to the $46 range before rallying back, dipping again, and then rallying back up to the $56 range again last week. This pattern caught my eye as it looks as though the stock is forming a double top pattern. If that is the case, the stock could be looking at dropping back down to the $46 level.
Looking at the daily chart, we see the resistance at the $56 level and the support at the $46 level. We also see that the stock is overbought on the daily chart and that the slow stochastic readings just made a bearish crossover.
The combination of the double top pattern, the overbought status and the bearish crossover leads me to believe that American Airlines is heading lower in the coming weeks.
Another factor in my outlook toward American Airlines is the extreme optimism toward the stock. There are 18 analysts following the stock, and 15 of them have the stock rated as a “buy” while three have it rated as a “hold.”
Short sellers are shying away from the stock as well, as evidenced by the short interest ratio of 1.10.
At first glance I thought there might be some bearish sentiment from options traders, because the put/call ratio is higher than 89% of the readings for the past year. However, the ratio is only 0.49, meaning that there are twice as many calls open as there are puts, and the ratio hasn’t been higher than 0.64 in the past year.
Given the three drivers on the chart and the overly optimistic sentiment toward American Airlines, I see the stock moving back down in the coming weeks.
I would look to short the stock above the $53.50 level and would target a move to the $46 level at the very least. If the stock breaks below the $46 level, it has a second layer of support just below $45 which stems from the high last summer.
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