2023-05-22 11:49:13 ET
Summary
- The COVID-19 pandemic has had a significant negative impact on the airline industry, resulting in grounded flights and declining stock values.
- The technical charts of United Airlines indicate significant market fluctuations, with the emergence of an ascending broadening wedge followed by a symmetrical triangle formation.
- The market should experience its next move once a breakout occurs from the symmetrical triangle formation.
The COVID-19 pandemic has caused a significant transformation in the airline industry, reflecting global circumstances. The industry, which was previously flourishing, experienced a significant decline as airplane operations ceased and stock prices dropped. United Airlines Holdings, Inc. ( UAL ), a prominent player in the industry, recently announced an expected loss for the current quarter. This can be attributed to rising fuel costs and potential financial obligations related to new pilot contracts. These challenges are not limited to UAL alone but could impact the entire industry.
Despite the difficulties, UAL maintains a positive outlook for the full year. Encouraging demand patterns suggest that UAL may eventually find ways to offset the higher costs. This article seeks to analyze the present market situation of UAL through price action analysis and propose crucial entry levels for long-term investors.
Turbulence and Recovery in the Airline Industry
The airline industry has experienced considerable fluctuations over the last few years, marked by the devastation from the pandemic that notably crippled travel demand. However, the subsequent introduction of COVID-19 vaccines has triggered a significant resurgence in demand, enabling the stocks to recover a substantial portion of their lost value. UAL's CEO, Scott Kirby, optimistically postulates that the pandemic's effects, such as increased work flexibility, might prove beneficial for UAL and help counterbalance the historically cyclical nature of the industry.
Despite this resurgence, the path to recovery is not without its challenges. UAL reported a loss of -$0.63 per share for the first quarter of 2023. This shortfall is attributed to the compounded effects of rising fuel prices and the potential financial commitments resulting from a new pilot deal. Investors appear to be speculating these issues are not exclusive to UAL, as fuel represents the most substantial non-labor expense for UAL, and with a glaring pilot shortage hindering industry growth, labor stands in a favorable position to negotiate new contracts throughout the sector in my view.
However, the news is not all dire. UAL's full-year guidance remains intact, suggesting that management remains confident about demand patterns and the ability to recuperate what was lost in the first quarter throughout the year. In fact, if demand maintains its current momentum, UAL and other airlines should have the pricing power to counterbalance higher costs over time. Early signs are promising, with the typical January travel slump absent this year, and full flights persisting through the spring break. I believe the industry's health is sufficient to withstand a down cycle for long-term investors.
UAL has displayed a robust financial performance, as evidenced by the impressive 33.83% growth in annualized total returns over the last three years as shown in the chart below. This significant increase showcases the resilience and adaptability of UAL's strategic approach amidst a dynamic and challenging market environment. It demonstrates the effectiveness of the airline's initiatives aimed at improving efficiency, enhancing customer experience, and expanding its global network. The positive total returns further undermine investor confidence in the company's long-term growth prospects and overall business strategy.
Building on this, the annual and quarterly revenue depicted in the subsequent chart illustrates a swift rebound from the lows brought about by the pandemic, indicating healthy growth for UAL. The yearly revenue for 2022 touched a significant $44.95 billion, while the quarterly revenue reached $11.43 billion. This trend shows a strong inclination towards an upward trajectory. This positive financial trajectory implies that UAL is not only recovering from the pandemic's impacts but is also on a course of significant growth and potential profitability.
The Emergence of Symmetrical Triangle
The technical analysis suggests considerable market fluctuations have followed the turbulence of the COVID-19 crisis. As illustrated in the chart below, this tumultuous period is denoted by the emergence of an ascending broadening wedge, extending from the 2009 lows of $3.07 to the 2018 highs of $97.85. This development points to a significant increase in market volatility, which ultimately led to a drastic 81.81% plunge in value. This significant decrease served as a determinant factor in the breakout from the ascending broadening wedge, giving rise to a symmetrical triangle formation post-breakout. The symmetrical triangle implies a period of price consolidation, drawing closer to the triangle's apex where any breakout could precipitate a pronounced market movement.
The current status of the RSI situated above the 50 mid-level - alludes to a possible bullish turn for the market, provided a price close above $55 materializes this month.
Further evidence for a potential bullish scenario can be gleaned from the pattern formations in the monthly chart below. Notably, the formation of a double bottom at $2.80 and $3.07 in 2008 and 2009, catapulted prices to higher levels. The red line indicates a buying level. Similar market behavior is currently being observed, with the pandemic-induced low at $17.80 contributing to a nascent double-bottom formation. A break above $60 could potentially signify a bullish breakout and a rise in market prices.
Key Action for Investors
In the midst of hefty market fluctuations following the COVID-19 crisis, discerning profitable trading opportunities can prove challenging for investors. Nevertheless, a few key levels stand out as potential pivot points for executing strategic market positions. The weekly chart below showcases the formation of a rounding bottom, with the neckline positioned at $60. The existing price fluctuation pattern suggests an upward trajectory, promoting a bullish market posture. However, the market would not officially be considered on an upward trend until the $60 threshold is breached. A break above this value could potentially signal a profitable buying opportunity for traders.
Further elucidation on the aforementioned trends is provided in the daily chart for UAL, which reveals a trading channel formation. This channel emerged following the drop from $55.04, intimating the possibility of a bear flag formation. This bear flag threat could be mitigated if the price closes above $48 on a weekly basis but might be activated if the price drops below $40. With the current price hovering at the apex of the trading channel, traders are advised to await a market correction before implementing long positions. A drop below $40 could disrupt the bullish formation, and a further drop below $30 might trigger a major downturn in the market.
Conclusion
In conclusion, the airline industry has experienced remarkable swings, particularly due to recent crises. The global pandemic, in particular, catalyzed a significant downturn, leading to widespread challenges across the sector. Nevertheless, according to the technical charts, the industry has bounced back from the lows imposed by the pandemic. The post-pandemic revenue growth further testifies to UAL's robust financial health. The technical examination reveals noticeable market volatility, evident in the bullish patterns showcased by the double bottom. If there's a weekly closing above $55, it would spark a substantial rally, and a monthly closing over $60 would validate a bullish perspective for UAL. Conversely, a dip below $30 would signal a market downtrend. Investors are advised to consider buying on any pullback and watch for the $60 mark to confirm the next market rally.
For further details see:
United Airlines: Buy The Bullish Momentum (Technical Analysis)