I don’t chase headlines, but last weekend they were in my face about airlines cancellations. Due to high Covid-19 infections, companies canceled thousands of flights globally. Therefore contemplating investing in American Airlines (NASDAQ:AAL) stock seems counterintuitive today.
But that’s what we are doing, because I have a simple thesis. AAL stock is hovering above a solid support zone. Losing that level will take extraordinarily bad circumstances that are not on the horizon now. This presents a compelling long-term opportunity.
Short term, it could get a bit bumpier into January.
Before I present the evidence of how significant the support zone is, we have to address the fundamentals. Sadly the story there is pretty murky and won’t be much help. The pandemic completely demolished business for all travel and leisure companies. They lost their revenue streams for months at a time. And it is a miracle that more of them didn’t go bankrupt.
Thanks to the low-interest-rate environment, most of them borrowed to survive these wounds. The government also helped as much as it could. But the result of it all is that the fundamentals for AAL stock are not as reliable now as they usually are. Judging the company outlook by its current financials is unfair.
The Business Is Still Recovering
The industry is nowhere near being back to normal. Just this weekend we recorded the highest levels of Covid-19 infections. Even though the US authorities are relaxing the quarantining guidelines, the pandemic is still in full bloom. Luckily by now we know a bit more about it, so we are still able to move around. Mask mandates are back, and vaccinations efforts continue.
If there is another lockdown, AAL stock will go much lower. For now, this is not a likely scenario, as the regulator tones have mellowed out a bit. Having vaccines, and the experience treating the disease, has given the medical community some confidence. This is resulting in less-strict lockdown rules globally.
Since the fundamentals don’t make the argument, today I will lean on the chart. When the world was perfect in 2019, AAL stock was already struggling. Then, after the 2020 outbreak, it just fell off a cliff. Once AAL loses $24 per share it fell into a crater. It took it three months to place a tradable bottom.
From there, the exuberance was too much trying to regain the $24 ledge. The effort quickly fizzled and shares reverted almost back to the lows. Three months later, the swoon that followed almost took the stock back to the pandemic lows. However the bulls consolidated well and were able and rally hard. Earlier this year they even reached the pandemic gap.
While that was an impressive feat, it too faded. In fact, it failed a second time in June. Since then, AAL stock has been trading in a descending channel of lower-highs and lower-lows. And therein lies the opportunity, because it is now approaching $16 per share. The bulls have defended it well for 18 months.
AAL Stock Holders Will Get Bolder Lower
Furthermore, there is more support from the volume profile, suggesting strong hands. The owners of the stock now have better conviction than at the depth of the pandemic. There should be no intrinsic reason to go lower without a market-wide correction. Therefore, the bullish thesis now in AAL stock also depends on the market into 2022.
Investors can simply buy a starter position now for the long term. Those who know options can also ameliorate their positions using those. There are many tricks that you can overlay on top of owning equities to make them better. Selling puts or covered calls are popular strategies that help mitigate some risk.
Make no mistake about it, the bears are in charge of the AAL price action overall. And this is not a recent development from the pandemic. It has been free falling in a descending channel since 2018. It peaked at $59 per share and never went back. The investors now are in the process of trying to reverse the trend.
To help them with that, we have to go back even further. Out of the 2008 financial crisis, the stock really took off from the levels that are just below current price. Therefore it will take extraordinary events again this time around. I told you this is more about chart talk than stock talk, and that is by default. When the fundamentals are of no use we have to get creative.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.