Now we will zoom in a bit on a shorter term daily chart which clearly shows six straight days off selling on increasing volume immediately after we made a new high. This action also took the index right through its 50 day Exponential Moving Average. These are two additional factors that should get your attention.
Now lets take a look at the charts of three major carriers beginning with United (UAL). After reporting earnings after the market close on 7/18, the stock gapped lower the following morning and it’s been downhill ever since. Volume was extremely heavy that day as it traded over 15 million shares, more than three times normal activity. Volume remained comparatively heavy over the next several trading sessions with the stock closing very near the days low each day. Additionally, we notice that our 10, 20 and 30 day moving averages are crossing over hinting of a possible change in trend. Finally, similar to the Airline Index itself, UAL made new highs on 6/2 on much lower than average volume. All things being equal, we want to see an increase in trading volume at new price highs.
Now on to Southwest (LUV). Here we can also see an initial push lower from new highs under fairly heavy selling pressure. This sell-off is a bit more orderly that that of UAL however, its has lasted nearly a week longer and it also has traded though its 50 day EMA. Additionally, like UAL, we can see the beginning of a possible crossover in the moving averages signaling possible trend change. We also take note of the very weak volume on 7/7 as Southwest notched a new high.
Lastly, let’s take a peek at Delta (DAL) and the picture here isn’t much better. We can see a move down similar to that of LUV. An initial thrust lower accompanied by heavy volume and a breaking of the 50 day EMA. Here, we can also see that the previous breakout level of around $52.00 has been unable, at this point, to serve as support on the way back down.
In summary, while these stocks may possibly set up as short sales in the near future, we want to limit our short exposure as we are in the midst of an up trending market. That said, good short set ups can and do present themselves in bull markets evidenced this year by many retail and energy sector stocks. Whether or not you decide to take on shorts, it always pays to see the markets from both sides so we can stay sharp and be prepared to recognize any possible changes in market character.
-CJ Agresta, Trust The Process Trading