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Unusual Pattern of the Day: Southwest Airlines (LUV)

Unusual Pattern of the Day: Southwest Airlines (LUV)

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  • With passenger traffic perking up at last, and with potential stimulus after the election, it’s no surprise that airline stocks have been trending up. One player, Southwest Airlines (LUV), just threw off a signal that the rally will continue.

    The signal is a golden cross. The stock’s 50-day moving average has crossed over the 200-day moving average, indicating that the short-term bullish trend in shares has a ways to go.

    Shares have been gradually heading up since July, albeit with a number of pullbacks along the way. Traders have generally liked the airlines, and most of them have beaten on earnings expectations for the third quarter and have worked to reduce their daily cash burn rate.

    Action to take: The long-term uptrend is an attractive one. The 200-day moving average is also declining rapidly as the March drop in shares is being factored in. So while an uptrend is still likely, it may not be a steep trend.

    Traders can still bet on the current trend. The March 2021 $40 calls trade right at-the-money. With a price around $4.85, they offer traders a leveraged bet on a continued rally in shares. Even if shares only move 10-15 percent higher, the at-the-money option can provide returns of 40-50 percent. For a stock like Southwest, which has been trending higher gradually, this approach will offer the best return potential.

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