Shares of budget airline Southwest Airlines Co. (LUV) have doubled in price from their pandemic lows, but prices have now formed a rising wedge pattern, signaling the potential for a sharp breakout in the coming weeks. On the chart below, you can see the red resistance line and green support line narrowing as we kick off 2021.
Southwest Airlines is set to report earnings for the fourth quarter before the market opens on Thursday, Jan. 28. It could be just what the stock needs to break out of this price pattern. Here's what to watch.
What to Watch With LUV
The stock is trading right at the green support line on the chart. It would not have to fall much on earnings to quickly break that key level and tumble lower from there.
However, Southwest has some upside potential here. Shares could pop 10% on earnings and still be stuck in this wedge pattern, based on where the red resistance line is sitting. It would have to do better than that to break out to the upside.
What's really interesting is that the market is pricing in only a 2% move on earnings. That could be enough to keep the stock trending lower, but it sets up a chance of a surprise to the upside. A 10% move only retraces the price action of the past week and a half. That's nothing these days.
The chart is showing us that a breakout is imminent, but the market doesn't believe it is going to happen when the company reports earnings. If earnings don't shock the markets, the stock could stay flat and slowly grind higher in this rising wedge pattern.
The Bottom Line
Earnings coming up for Southwest could be the push the stock needs to break out of a rising wedge pattern. However, the market doesn't expect it, which could set up for a nice surprise after earnings. If the market reaction to earnings is flat, then we should expect the stock to grind higher in this wedge formation until we get a breakout above or below the key levels.