Airline Bounce Unlikely to Gain Traction

United Continental Holdings, Inc. (UAL) led a broad recovery rally on Wednesday, lifting nearly 5% to a five-week high after beating first quarter earnings estimates by nine cents and raising the low end of fiscal year 2018 guidance. The carrier triggered a major sector decline in January when it told analysts that it would increase capacity 4% to 6% per year for the next three years, raising fears of an industry price war.

Rival American Airlines Group Inc. (AAL) rose over 4% but could lose ground after next week's earnings because United's plans could affect 2018 growth and profits. However, ticket prices have been rising so far in 2018, and there are few signs of airline overcapacity in the strong economic environment. Delta Air Lines, Inc. (DAL) reinforced that theme earlier this week, also meeting estimates and confirming guidance. (See also: Airline Stocks Are a Cheap Buy: Bernstein.)

United Continental Holdings, Inc. (UAL) shares topped out in the low $70s in February 2015 after a multi-year uptrend and sold off in a multi-wave correction that found support in the low $40s in June 2016. The stock completed a round trip into the prior high six months later and stalled out, grinding sideways into a May 2017 breakout. That rally failed immediately, trapping bulls in a steep decline that ended in the mid-$50s in the fourth quarter. 

The stock turned higher once again in November, but the uptick ended with a high-volume gap at the .786 Fibonacci sell-off retracement level in January 2018, right after the capacity announcement. It ground sideways into April, failing to fill the gap while investors awaited this week's earnings report. The post-news rally reached within 1.5 points of the big hole, which will take considerable buying power to mount.

On-balance volume (OBV) topped out at the 2010 high in 2014, well ahead of the 2015 top, and lost ground into the middle of June 2016. It surged higher into February 2017, stalled once again at resistance and dropped like a rock into September. Buying power since that time has failed to pierce the midpoint of the 2017 swoon, indicating weak institutional sponsorship that lowers the odds for a 2018 breakout.

[Learn more about Fibonacci retracements in Chapter 6 of the Technical Analysis course on the Investopedia Academy]

American Airlines Group Inc. (AAL) adopted U.S. Air's long-term chart following the 2012 merger. The stock topped out in the mid-$50s in January 2015 and entered a decline that hit a two-year low in the mid-teens in June 2016. The subsequent recovery wave made quick progress up to $50 and eased into a shallow rising channel that took more than a year to reach resistance at the prior high.

A January 2018 breakout failed in less than two weeks, triggering a gap between $55.50 and $57.50. The subsequent decline found support in the mid-$40s in February, triggering a bounce that stalled after filling the gap. The stock sold off into April, cutting through the first quarter low before bouncing this week at November 2017 support near $45. It is now trading well below the 200-day exponential moving average (EMA) but is still holding channel support, offering bulls an opportunity to gain ground into next week's earnings report. 

OBV topped out in March 2015 after a vertical burst and ground sideways into the middle of 2016, despite the 30-point sell-off. It has been stuck in an oscillating pattern since that time, with alternative waves of bull and bear power. The last buying wave fizzled out below the 2017 peak in January 2018, while this week's rally impulse has barely moved the indicator, suggesting that it will take a major bullish catalyst to generate a new uptrend. (For more, see: 4 Oversold Stocks Poised to Soar on Earnings.)

The Bottom Line

United Continental and American Airlines have failed to break out above 2015 resistance, despite the historic bull market, and the stocks offer little value to buyers at this time. (For additional reading, check out: Why Airlines Aren't Profitable.)

<Disclosure: The author held no positions in aforementioned securities at the time of publication.>