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Delta Air Lines (NYSE: DAL) is scheduled to report earnings on Wednesday morning. The stock has been a huge winner in the last year, with shares rising 124%. I figured now would be a great time to take a look at the charts, the sentiment and the fundamentals of the stock before tomorrow’s earnings announcement.
On the daily chart, the only thing that really stands out is how the stock has pulled back with the rest of the market recently. Additionally, the recent low was at the same level of a previous consolidation in February. I also see that Delta Air Lines stock has just moved out of oversold territory based on the daily stochastic readings.
The weekly Delta stock chart presents something interesting as well. The stock has not closed below its 13-week moving average in over a year. That just goes to show how strong of a rally Delta Air Lines stock has experienced in the last 18 months. The stock has more than tripled since December 2012. I have marked the last time the stock closed below its 13-week moving average with a blue circle.
The problem is that with the rally, the sentiment indicators have become incredibly bullish on all three fronts: 1) short interest, 2) put/call ratio, and 3) analyst ratings.
The short-interest ratio is a meager 1.4, meaning it would take less than two days of average volume for the short sellers to cover their short positions. Meanwhile, the put/call ratio is only at 0.30. That may not mean much to you, but it’s lower than 94% of the readings from the past year. Remember that a low put/call ratio is indicative of a bullish view for option traders.
The third sentiment indicator that I analyze is the analyst ratings. 18 investment analysts currently follow Delta Air Lines stock. And 17 of those analysts rate the stock a “buy.” The only other time I remember seeing such a bullish skew from the analysts was several years ago when Google had 24 of 25 analysts rating it as a “buy”. As I recall, the other sentiment indicators on Google were similar to those we are seeing on DAL. When GOOGL came out with earnings, they beat the consensus estimate, but the stock dropped over 20% in the coming months.
The problem for a stock when the sentiment indicators are so bullishly skewed is that there are a very few buyers left for the stock. The odds of having an upgrade are almost non-existent and there is no chance of a short-covering rally. The company may beat their earnings estimate, but it will have a hard time rallying even it does.
Trading stocks ahead of earnings reports can be a risky business. I discussed this a bit in yesterday’s Netflix Stock Chart Analysis article. In the case of NFLX, the chart and sentiment suggested the path of least resistance was to the upside. In the case of DAL, the path of least resistance seems to be to the down side. If I were going to play DAL ahead of their earnings report, it would be a small bet, but it would be a bearish one.
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