Airlines Showing Relative Strength with Crude Oil Down

Dec 9, 2008: 12:16 PM CST

One of the beneficiaries of lower crude oil prices has been airlines companies, as evidenced by the $XAL Airline Index.  Let’s take a look at these developments and what’s happening to the Airline Index right now.

$XAL Airline Index Weekly:

The index is currently testing against overhead resistance via the flattening 50 week EMA, but there’s a multi-swing positive momentum divergence that has been building almost for the entire duration of 2008.  Price is consolidating currently, coming off a pervasive and destructive downtrend.  Although we’ve established higher lows, we’ve yet to establish an official ‘higher high,’ and so the official trend remains down until price can break above the weekly 50 EMA and form a higher high.  Until then, we’re in ‘no-man’s land’ until we get that higher high… or price fails and forms a lower low, reconfirming the established downtrend.

Also, notice that the $XAL has been showing relative strength to the S&P 500 since July when Crude Oil topped above $140 per barrel (which was devastating the airlines due to high fuel costs).  Though price is not making a series of higher highs and higher lows, the Relative Strength line is doing so, hinting at underlying strength perhaps yet to come.

One has only to imagine the price hikes and fare increases the airlines set in place as a necessity to combat higher fuel costs remaining in effect after the price of fuel has fallen dramatically – it’s like a double blessing to cash-strapped airline companies, adding a little fundamental strength to the developing technical picture.

Let’s look briefly at a comparison of Crude Oil prices and the $XAL itself – it’s almost a full inverse relationsihp… almost.  Keep in mind that the weakening economy is somewhat decreasing commercial and personal travel.

$XAL Airline Index Weekly compared to Crude Oil:

The airlines continued down while crude continued up… then in July 2008, the trends were reversed, though only to an extent.  Again, a weaker economy put pressure both on company stock prices and ticket sales in the form of reduced passengers – that’s one reason the relationship has not continued strictly inversely to the present.

Still, lower (in this case, drastically lower) fuel costs have a bullish result on company prices, which may be a reason these companies are showing relative strength to the S&P.  For sustained bullishness to return, we’d need to see a break above the $25 level in the $XAL, along with corresponding strength in many of the key stocks that make up the index.

Continue to scan here for potential opportunities, but watch out if crude oil prices begin to rise suddenly any time soon.

Corey Rosenbloom
Afraid to Trade.com

8 Comments

8 Responses to “Airlines Showing Relative Strength with Crude Oil Down”

  1. Kevin Says:

    I agree with your analysis as I too am watching the airlines but I’d hate to think what would happen to some of these stocks when crude oil bounces.

  2. Corey Rosenbloom Says:

    Kevin,

    I realized that about halfway through writing this post – that I’m utterly bullish on Crude Oil unless we break $40, and just made that clear in the post early this morning.

    It’ll be an interesting dynamic to see play out. I’m neutral on the airlines until we break above $25 on the index, but acknowledge they’ve been showing RS in this environment which isn’t anything to sneeze at.

    Something’s gotta give.

  3. Andrew Stanton Says:

    Could it be just finishing an E wave of a triangle?

  4. Corey Rosenbloom Says:

    Andrew,

    Certainly could be – the only issue is that we have to assume that was a major (major!) third wave which stretched from 2007 to July ’08. There weren’t many swings during that time, but rather almost a steady drumbeat of selling – fine for a 3rd wave which would put us in the 4th wave corrective phase, which is similar to the broader US equity index Elliott positions.

  5. Dominick Says:

    Hello Corey. If I may, a quick question in reference to Divergence. I can see from the $XAL chart that the divergence begins on March “08” and runs through July “08” when the reversal occurs up to the 50 EMA. At the point of reversal would the Divergence clock then “reset”, meaning it would be time to start looking for the beginning of a new series of divergence? Also would it be considered “normal” for the 3/10’s highs and lows to corrospond to the stock price’s highs and lows. Thanks in advance.

  6. Corey Rosenbloom Says:

    Dominick,

    That’s a power-packed question!

    Generally, yes. To me, a divergence is only good for a clean retracement usually to the 20 or 50 EMA but it doesn’t give any signals beyond that – it’s a clue that we’re likely to have a counter-move and that it could be stronger than normal. Although a divergence pattern frequently precedes actual price reversals, divergences are NOT reasons to expect reversals.

    Think of it this way – almost all price reversals are preceded by reversals… but not all divergences lead to price reversals. Sort of a logic puzzle.

    Regarding the 3/10 and price highs – no, totally no. The oscillator would be absolutely of no value if that were the case – why not just look at the price itself if it registered the same thing? The oscillator is useful when it *should* be saying something but it’s not – for example, it *should* follow that a new price high should be met with a new oscillator high. If it’s not, then there in is your signal that something isn’t right (non-confirmed) with the new price high.

    Wait – I may have misread your question. Yes, it would be normal if oscillator highs equaled price highs – so when ‘abnormalities’ (aka divergences) occur, then you need to look ‘under the hood’ to see why this is occurring and what it might mean.

    Divergences all need to be confirmed by price breaking a key EMA or completing a “sweet spot” trend reversal.

  7. Vasu Says:

    orey !!

    Also the $40 support price of CRUDE coincides with the 33% fibonacci retracement drawn between the peak of crude and 1999 start of crude rise .

  8. David Says:

    I wondering if the divergance is a fluke given its in a triangle ?