Brocker.Org: Southwest Airlines Confirms Multi-year Breakout

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Southwest Airlines, Co. (LUV) has lifted into a market leadership role in 2017, posting a series of new highs while its rivals struggle with bad headlines and heavy competition. The Dallas-based carrier now occupies the second slot in D.J. Transportation Average component performance, just below CSX, Corp.(CSX), which has benefited from merger and acquisition chatter.

The company’s sizable competitive advantage has grown since the presidential inauguration, with newly restrictive travel and immigration policies splashing cold water on U.S. tourism by foreign nationals. Besides, Americans may curb their appetites for foreign travel in coming years as discomfort with U.S. policies generates uncomfortable backlash across Europe and Asia.

LUV Long-Term Chart (1991–2017)

The stock broke out above multi-year resistance at $1.30 (post six stock splits) in 1991 and entered a powerful uptrend that stalled at $7.72 in 1994. It consolidated gains for four years, stuck in a trading range between that level and support just above $3.00, and broke out once again in 1998. That advance unfolded in multiple waves that ended in the low-20s in January 2001. Price behavior changed after the September 11th attacks due to its massive impact on the airline industry, with rising volatility generating multiple swings and trend failures.

A series of lower highs into the second half of the decade lowered volatility levels, ahead of the 2008 economic collapse, which dumped the stock to an 11-year low at $4.95. It returned to the multiyear trendline of lower highs in 2013 and broke out, entering the most productive period in its public history, lifting nearly 35-points into the January 2015 high at $47.17.

That marked the rally peak, ahead of a triangular correction that found support in the lower to mid-30s. Higher lows in February and August 2016 underpinned the long-term bull pattern, attracting steady buying interest that yielded a powerful breakout in January 2017. The initial rally surge ended at $59.68 in early March while a pullback attracted committed buyers near the 50-day EMA, ahead of a bounce that’s reached an all-time high above $60.

Long-term breakouts tend to unfold in three distinct phase. First, a financial instrument rallies above easily observed resistance. Second, it pulls back in a profit-taking exercise that transfers ownership into stronger hands. Third, it rallies above the first major swing high after the breakout, confirming the uptrend while adding considerable momentum. Southwest has now entered the third and often most productive phase.

LUV Short-Term Chart (2015–2017)

LUV

The January 2015 high established resistance in the upper-40s that ended breakout attempts in December 2015 and April 2016. In conjunction with higher lows, the broad pattern evolved into a symmetrical triangle, with a timely fourth-quarter 2016 breakout completing the continuation pattern. The stock pulled back in March, touching the top of the late-2015 peak while setting off low-risk buying signals that triggered a quick advance back to March resistance. A breakout into the 60s has completed this progressive pattern, opening the door to much higher prices.

On Balance Volume (OBV) topped out with price in 2015 while the subsequent distribution wave held high in the multi-year range. This resilience underpinned buying pressure that’s lifted the indicator to a new high along with the price. This technical input adds to the highly bullish outlook, with a loyal institutional shareholder base expecting superior returns on their investments in coming years.

The Bottom Line

Southwest Airlines broke out above 2-year resistance in the upper-40s in the first quarter of 2017 and reached a new high near $60. A pullback into the second quarter attracted sizable buying interest, triggering a bounce that’s now lifted into a new high. This positive price action confirms the first quarter breakout while raising odds for a momentum-fueled rally that could reach the 70s or 80s.

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