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Over the last six months, the airline stocks as a whole have been struggling. United Continental Holdings (NYSE: UAL) is no exception, having fallen from almost $75 a share to as low as $49.85 early last month.
United Continental stock has rallied back a little in July, but that has only brought the stock up to the upper rail of a downward sloped trend channel. This doesn’t give me much hope for the stock over the coming weeks, and it doesn’t help that the daily stochastic readings just hit overbought levels and did a bearish crossover.
The weekly chart also provides some ammunition for a bearish case, with the stock recently falling below its 52-week moving average and now facing potential resistance from the trend line.
Given that I focus mainly on technical analysis, the patterns in the charts alone are enough to make me bearish on United Continental, but there are other factors that add to my bearish stance.
My first concern is the sentiment toward the stock. The short interest ratio is a paltry 1.3. Of the 16 analysts following the stock, 12 have it rated as a “buy” and the other four have it rated as a “hold.” These are pretty optimistic readings for a stock that has dropped in value by a third so far this year.
Another factor that bothers me is that airline stocks have been falling while oil prices have been pretty subdued. Ordinarily airline stocks rise when oil prices fall and vice versa. But so far in 2015, oil is down slightly for the year and United Continental stock is down more. And it isn’t the only stock where this is the case. All the major airlines are down in 2015.
United Continental is expected to release its quarterly earnings report on July 22. Analysts expect the company to show earnings per share of $3.31, which has been ratcheted up slightly in the past week and is indicative of increased optimism.
United Continental has a pretty good history of beating earnings expectations, but that hasn’t always caused the stock to move higher. In January and April, the stock moved slightly higher after earnings were released, but then fell over the ensuing weeks.
Given the bearish trend in the charts, the bullish sentiment and the poor price performance while oil has been moving sideways, I fell pretty bearish about United Continental stock. I would look to short the stock in the $55-$57 range with a downside target of $47.50.
Should the stock move above the upper rail of the channel and above its 52-week moving average, this would be my sign to shut down the bearish trade. If you want to be more cautious, you may want to wait until after the earnings announcement next week.
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