Delta Air Lines, Inc. (DAL) kicks off fourth quarter earnings season for major American airline carriers next week, with analysts expecting the company to report earnings per share (EPS) of $1.29 on quarterly revenue of $10.8 billlion. The sector has slumped badly in recent months despite top-line growth and expanding margins, with bullish sentiment soured by trade tensions that could reduce worldwide business activity.

The shares of United Continental Holdings, Inc. (UAL) performed better than rivals in 2018, ending the year with a 24% return, compared with Delta's 11% decline, while laggard American Airlines Group Inc. (AAL) fell more than 38%. This divergent behavior is unlikely to continue if trade wars dominate 2019 headlines like they did last year, setting the stage for a broad industry downturn that could test 2016 lows.

Fortunately for bulls, major carriers have now reached support levels that could trigger oversold bounces, offering an excellent opportunity to gauge 2019 buying interest. Bears hold the advantage at this point, suggesting that rallies will get sold aggressively, ahead of additional downside. However, if last year's cruel market has taught us anything, it has been to expect the unexpected, especially from Washington.

Technical chart showing the share price performance of Delta Air Lines, Inc. (DAL)
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Delta Air Lines shares posted solid gains after bottoming out in the single digits in 2011, lifting above $50 at the start of 2015. The stock has carved a long series of slightly higher highs since that time, adding just 10 points into November 2018's all-time high. Delta stock is trading near $50 again after a December swoon, translating into zero returns before dividends in the past four years. Short sellers have fared just as poorly during this period, with price action stuck within a trading range of 9 to 12 points.

It will take tremendous buying power at this point in the economic cycle to lift the stock above the shallow rising highs trendlines between $61 and $64. However, the stock could easily break down because the sell-off through December violated a rising lows trendline in place since 2017 (red line). In turn, a failure to remount the $51 to $52 resistance zone in the coming weeks could presage a quick trip into the lower $40s.  

Technical chart showing the share price performance of United Continental Holdings, Inc. (UAL)
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United Continental Holdings stock rallied 23 points above the 2007 high in January 2015 and topped out, entering an orderly correction that continued into the third quarter of 2016. It bottomed out in the upper $30s and turned higher into 2017, stalling just above the 2015 high. Price action finally cleared that resistance level in August 2018, reaching an all-time high in the upper $90s on Dec. 3.

The stock sold off to the October low in the upper $70s in late December and could turn higher in the coming weeks. The bounce, if it comes, needs to clear the September high at $91.39 or risk carving the right shoulder of a head and shoulders topping pattern. Conversely, an immediate breakdown would target the unfilled July gap between $73 and $76, which also marks breakout support.

Technical chart showing the share price performance of American Airlines Group Inc. (AAL)
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American Airlines Group stock topped out with other major carriers in the first quarter of 2015 and turned sharply lower, dropping to a two and a half-year low in the mid-$20s in June 2016. A slow-motion recovery wave reached the prior high in January 2018, triggering an aggressive reversal, followed by a long series of lower highs and lower lows into year end. The stock posted another two and a half-year low in the last trading week of 2018.

This is a two-edged sword because a rising market tends to float all boats, indicating that American Airlines could post impressive returns if the sector and broad market turn higher in the coming months. However, sector laggards tend to lose value faster than relatively strong components in persistent downtrends, setting the stage for the stock to break the 2016 low and drop into the teens.

The Bottom Line

Major airline carriers should post solid fourth quarter results, but that may not stem persistent selling pressure driven by macro themes facing the broad market. 

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