Southwest Airlines Co. (LUV) stock has surged off its May 14 six-year low in reaction to improved bookings, triggering a wave of bottoming calls, but is now the right time to take exposure in the damaged airline sector? The answer depends on time frame and stomach acids because new shareholders are likely to suffer through sleepless nights until the threat of a second pandemic wave passes in the spring of 2021.

The short-term uptick has now reached the 50-day exponential moving average (EMA) in the low $30s, which was broken on heavy volume in February. In turn, this is a perfect location to watch the bull/bear conflict, looking for relative strength clues that could predict future price action. A volume uptick and breakout right here could be instructive, setting off buy signals for bottom fishers, while a reversal could easily reach the March low.

Despite the increase in bookings, the company still expects May 2020 operating revenues to fall 85% to 90% year over year and bookings to decrease between 60% and 70%. This marks an improvement over prior guidance, but it's not enough to stop the red ink because thin margins and years of stock buybacks have weakened the carrier's balance sheet. Legendary investor Warren Buffet has taken note of the shortfall, selling airline holdings including his Southwest shares.

LUV Long-Term Chart (1991 – 2020)

Long-term chart showing the share price performance of Southwest Airlines Co. (LUV) 

A 1991 breakout above six-year resistance at a split-adjusted $1.37 attracted widespread buying interest, establishing an uptrend that stalled at $7.72 in 1994. The stock cleared that obstacle in 1998, splitting three times into the January 2001 top at $23.34. That marked the highest high for the next 13 years, ahead of a persistent but shallow decline that held support near $11 into a breakdown during the 2008 economic collapse.

The sell-off found support at a 12-year low in the deep single digits in the first quarter of 2009, finally ending the eight-year uptrend. The subsequent recovery wave stalled in the lower teens in 2010, yielding a successful 2011 retest that completed a bullish double bottom reversal. The stock broke out above a 12-year trendline of lower highs less than two years later, entering the strongest advance so far this century.

The rally reached the 2001 high in 2014, yielding an immediate breakout that finally stalled in the mid-$40s in 2015. The subsequent correction ended in a fresh breakout after the 2016 presidential election, lifting the stock to an all-time high at $66.99 in December 2017. Price action eased into a trading range in 2018, holding support in the $40s until a February 2020 breakdown stretched into a six-year low in the low $20s.

The May reversal unfolded on top of the 2001 high, successfully defending support at the 2013 breakout in the mid-$20s. The decline also carried through the 200-month EMA at the .618 Fibonacci rally retracement level before remounting that level, confirming higher support near $30. Taken together, it's likely that the stock has bottomed out, but an extended basing period will be needed before entering a new uptrend.

LUV Short-Term Chart (2017 – 2020)

Short-term chart showing the share price performance of Southwest Airlines Co. (LUV) 

Fibonacci grids stretched across the long-term downtrend from 2017 to 2020 and short-term downtrend between February and May 2020 are narrowly aligned with the declining 200-day EMA near $44 and broken 2018 low, marking an obstacle that isn't likely to get mounted on a first attempt. The stock will need to establish support at the 50-day EMA before reaching that barrier, and there are no guarantees that it will be successful. However, relative strength is now turning in the bulls' favor, raising the odds for an eventual uptick into the higher resistance level.

The on-balance volume (OBV) accumulation-distribution indicator topped out with price in 2016 and hit a three-year low in April 2020. An April 28 secondary offering of 55 million shares generated a massive buying spike, lifting OBV to an all-time high. However, that activity increased the float by around 10%, diluting the value of previously held shares, so the uptick may not be predictive.

The Bottom Line

Technical evidence raises the odds that Southwest Airlines has bottomed out, but the stock could underperform major benchmarks by a wide margin into 2021.

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