Weak Airlines Weigh Down Transports

07/21/2011 10:27 am EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

Airlines comprise the weak link that’s slowing the momentum of the Dow Transports, but a look at the charts shows that there is one airline stock that is bucking the trend and acting strong.

Over the past few weeks, I have been closely watching the Dow Jones Transports, as this was the only major average that made new yearly highs in early July. Since the March 2009 lows, the Transports have outperformed the S&P by 60%.

The week ending July 7, the Transports made a new high at 5627.85, but closed the week near the opening level at 5548. On the weekly candlestick chart (see below), this price action forms a “doji,” which is a sign of indecision. A higher close this week (i.e. above 5342) is needed to avoid further loss of upside momentum.

In looking at the industry groups in the Transports, the airline stocks are clearly the weak link, while the railroads are acting the strongest. This should not be too surprising, as typically, when crude oil prices are high, shipping via rail becomes more cost effective, while airline profits tend to suffer.

AMR Corp. (AMR), the parent company of American Airlines, has been in the news this week because of its plans to upgrade its fleet of planes by purchasing more fuel-efficient and quieter planes. It has been a rough few years for AMR, as the company has racked up some serious losses and is no longer the largest US air carrier.

Though the majority of domestic and global airline stocks also look negative, from a technical standpoint, there is one that is bucking the trend.

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Chart Analysis: The weekly chart of the Dow Jones Transports shows that the week after the doji was formed, the Transports dropped 3.7%. This is a bearish chart pattern that requires a move above 5627.85 to turn positive.

  • There is initial support at 5255, which is this week’s low, and then at 5141-5195. Weekly trend line support is at 5069, line a
  • The relative performance, or RS analysis, tested but did not exceed the December 2010 highs (line b) in July. The RS is still above short- and long-term support, lines c and d, respectively
  • Weekly on-balance volume (OBV) also did not make new highs in July, line e, but is holding above its weighted moving average (WMA). A drop below support at line f would be more negative
  • The daily OBV (not shown) did make new highs in July. It has turned up, but it is still below its weighted moving average
  • Initial resistance is at 5440 and a close above 5480 would be positive

The S&P Airlines index shows a well-established downward trading channel, lines g and h. It has dropped 26.8% from the November 2010 highs at 136.32. Since the May 2 high in the S&P 500, the Airlines are down 9.8% while the S&P is down just 2.5%.

  • Last week, the June lows at 105 were broken, and now, the July 2010 lows at 101.84 have also been violated
  • The daily chart shows several continuation patterns (dotted lines) that were brief interruptions in the downtrend. There is next support at 97 and then in the 88-90 area
  • The RS started a pattern of lower lows and lower highs last December and has dropped sharply over the past week. It is well below its downtrend, line i
  • Daily OBV shows lower highs, line j, but has not yet dropped below the June lows
  • There is first resistance at 105, and a move above the July highs at 110.90 would break the pattern of lower highs

NEXT: See Which Airline Stock Is Bucking the Dominant Trend

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AMR Corp. (AMR) spiked to $5.23 in Wednesday trading, but eventually closed lower on the day. There is next weekly support from 2009 in the $3.80-$4.00 area.

  • The RS is in a well-established downtrend, as it made further new lows in the past month
  • Students of RS analysis might ask about the break of the four-month downtrend (line c) in May, and while this was consistent with a rally in AMR, the fact that the RS did not exceed the prior highs (line d) kept the dominant downtrend in the RS intact
  • The daily OBV continues to look weak, having made a series of lower lows. Volume was heavy on Wednesday. It is below its WMA and the downtrend, line e
  • Weekly OBV (not shown) has confirmed the new lows
  • There is first strong resistance at $5.50-$5.70 with more important resistance at $6.17

Alaska Air Group (ALK) has clearly bucked the overall trend in the airline stocks, as even the key South American carriers like Brazil’s Gol Linhas Aereas Inteligentes SA (GOL) are in well-established downtrends. ALK made marginal new highs on July 6 at $70.61.

  • Monday’s low at $64.10 was not far above trend line support, line g, at $63.40. There is additional support at $61.30, which was the June lows
  • The daily RS has confirmed the recent highs and is in a well-established uptrend, line h
  • The daily OBV did confirm the recent highs, but has now dropped below its weighted moving average. A break of support at line i and the June lows would be a short-term negative
  • ALK has first resistance at $67.75 and then at $69.11

What It Means: Given the weak performance of the airline stocks, the recent new highs in the Dow Transports are impressive. However, a higher close in the Transports this week will be needed to keep the short-term momentum positive.

The iShares Dow Jones Transportation Average Index Fund (IYT) needs to close the week above $96.51. The fund has important support at $94.40.

The airlines are still not a favorable place to invest at this time, as the RS analysis has given a clear signal since late last year that the airline group would be weaker than the S&P 500.

How to Profit: Though the weekly analysis on Alaska Airlines (ALK) is still positive, buying strong stocks in weak industry groups generally works only at the start of a bull market. I will update the status of the Dow Transports in Friday’s Week Ahead column.

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