2 Soaring Airline Stocks That Could Be Due for Turbulence

United Continental Holdings Inc (NYSE:UAL) and American Airlines Group Inc (NASDAQ:AAL) are flying high today, as option traders climb on board, but a breather could be overdue for the overbought stocks

Dec 9, 2016 at 1:08 PM
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United Continental Holdings Inc (NYSE:UAL) and American Airlines Group Inc (NASDAQ:AAL) are two airlines flying higher today, after releasing November traffic metrics and receiving some positive analyst attention. While optimism seems to rule UAL and AAL's options pits today, it remains to be seen if this pair of stocks will be able to keep up their momentum, or if some short-term turbulence is due.

UAL last night raised its fourth-quarter forecast for profit margin, citing stronger bookings and lower expenses. In response, UAL has received no fewer than three price-target hikes, including a hike to $77 from $71 by Cowen and Company. Meanwhile, AAL also raised its current-quarter unit revenue forecast, and Cowen and Company raised its price target on the airline to $50 from $43. 

Both UAL and AAL options are trading at an accelerated pace today, with calls handily outnumbering puts, as traders bet on higher highs in the near term. More than 16,000 AAL calls have crossed the line so far, compared to just 8,400 puts, while UAL calls outnumber put contracts 5,348 to 3,103. Both stocks have seen apparent buy-to-open action at their most active option today, including one block of 1,499 AAL December 50 calls purchased for $1.07 each. This trader expects AAL to extend its quest for new highs through expiration next Friday.

UAL is up 4% so far today, trading at $75.61 -- a new all-time high -- and AAL has also notched a new annual high, currently up 4.9% at $50.40. Both stocks have more than doubled since their post-Brexit lows, and sit in overbought territory -- suggesting a short-term breather is in the cards. As of last night, AAL sported a 14-day Relative Strength Index (RSI) of 70, while UAL's RSI was at a lofty 78. In fact, late last month, UAL topped the list of the 40 most overbought stocks and ETFs.

What's more, while the airline sector has the highest percentage of stocks currently trading above their 80-day moving average, at 95%, it's also seen a notable number of stocks that have recently experienced a buying climax. A buying climax is when a stock hits an annual high during the week, only to end the week lower, and could indicate oncoming turbulence in the near term. Against this backdrop, would-be traders ought to take caution before betting on United Continental Holdings Inc (NYSE:UAL) and American Airlines Group Inc (NASDAQ:AAL).

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