Put Your Head Between Your Legs, And Kiss Your Airlines Goodbye

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Actually, this is not a bearish piece on the airlines at all–I just liked the title.

As you can see on the daily chart of the XAL (Amex Airline Index) below, today’s daily candle is residing completely below the lower Bollinger Band (“BB”). Indeed, this is a particularly rare occurrence, as even the prior times when price has dipped below the lower BB, the entire candle was usually not outside the band as well. Hence, it is fair to say that airlines are oversold here on a short/intermediate-term basis.

So, how does one go about playing the oversold airlines? First, I cannot stress enough the importance of having a clear stop loss in place. Oversold bounce plays are not situations where you want to be careless with risk management. After all, we are talking about stocks in downtrends, and a failure to adhere to stop loss discipline could easily see you fall victim to another leg lower.

As an example, take a look at AMR, forming a potential bullish hammer reversal candlestick today after a steep downtrend. We know that hammers need to be confirmed in order to register as a bonafide bullish reversal, so it makes sense to have a tight stop loss in place below the bottom of the hammer. Although it is not particularly enjoyable to be shaken out of a tight stop loss, you simply cannot risk getting caught in another sharp move lower. When they work out, oversold bounce plays are fun and make trading seem easy, which is all the more reason why you should be extra careful with them.

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