United Airlines Holdings, Inc. (UAL) just confirmed fears that the surge in COVID-19 cases is undermining hopes for a rapid recovery after the first quarter's massive shutdowns. In a July 6 "Town Hall" employee event, the carrier disclosed that July consolidated capacity is likely to contract 75% year over year, following an 88% drop in June. In addition, United warned that August guidance for 65% is likely to mark peak performance for 2020 passenger volume, with little or no improvement through year end.

United stock fell after the news, selling off into five-week support near $31.00. More importantly, accumulation-distribution readings have crashed in the past month, dropping within striking distance of the May low, which found support less than 30 cents above March's eight-year low. Support tends to weaken each time it gets tested, raising the threat of an eventual breakdown that drops United shares to levels not seen since 2009.

Chart showing the share price performance of United Airlines Holdings, Inc. (UAL)

It took nearly eight years for United stock to complete a round trip into the 2007 high above $50, yielding a modest 2015 breakout that topped out in the mid-$70s a few months later. A higher low in the $30s in 2016 stoked buying interest, ahead of a 2017 uptick that limped into December 2018's all-time high at $97.85. Price action held within a narrow trading range in 2019, finally giving way to a February 2020 breakdown that ended within three points of the 2011 low in March.

The downtick reversed at the .786 Fibonacci retracement of the nine-year uptrend, a common turning point, but the second quarter bounce failed to pierce the .382 selloff retracement level. It is now trading about half the distance between the March low and the June high, with price action growing heavier by the day. The monthly stochastic oscillator has failed to enter a buy cycle during this period despite a rally of 30-plus points, highlighting strongly bearish technicals that favor even lower prices.

American Airlines Nears Downtrend Low

The announcement from United raises doubts about plans by rival American Airlines Group Inc. (AAL) to increase summer capacity after upbeat remarks about May and June traffic. The recent willingness of these corporations to strike deals with the government for federal loans also suggests a dimmer view of future prospects because the bailouts will generate additional dilution through warrants issued to the U.S Treasury.

American Airlines shareholders have walked away since the July 1 announcement about increased capacity, dumping the stock to a five-week low. It is now trading less than four points above May's six-year low, exposing the downtrend to a breakdown that could eventually test the 2008 low at $1.45. It's only a small step from that price level to bankruptcy, or a loan-induced zombie state that persists well beyond the current crisis.

Chart showing the share price performance of American Airlines Group Inc. (AAL)

American Airlines stock posted an all-time high at $63.27 in 2006 and sold off to $1.45 during the 2008 economic crisis. A two-legged advance stalled within seven points of the high in 2015, giving way to a pullback that carved a trading range with support in the mid-$20s. An April 2018 breakout attempt failed, reinforcing range resistance while establishing a selling wave that broke support in February 2020, yielding a vertical decline into the lowest low since 2012.

The decline broke support at the .786 Fibonacci selloff retracement level near $14, while price action since the May low has been testing this critical level, with a failure setting the stage for continued downside into 2008's all-time low in the single digits. Like United, American accumulation readings have plummeted in an aggressive shareholder exodus, while long-term relative strength indicators have failed to respond to a high-percentage short covering rally. 

The Bottom Line

United Airlines warned employees that passenger volume is likely to stagnate through year end after modest second quarter gains.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.