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American Airlines Cracks a Key Level as Covid-19 Concerns Grow

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American Airlines (NYSE:AAL) shares continued their descent Thursday, marking the sixth straight losing session in a row. The 2.14% drop carried AAL stock deeper below the 200-day moving average and has fanboys looking to bail out. If you’re looking for a reason for the rollover, here are three to consider.

An American Airlines (AAL) airplane waiting on the tarmac. Represents airline stocks.
An American Airlines (AAL) airplane waiting on the tarmac. Represents airline stocks.

Source: GagliardiPhotography / Shutterstock.com

First, American Airlines has been tracking the trajectory of the Russell 2000 Index for most of the year. When small caps were in favor, AAL climbed. When the little guys fell out of favor, AAL dived. Though the Russell went bananas after last November’s vaccine news, its rally ultimately sputtered out in March. Given the past week of selling, the index has now fallen nearly 10% from its highs.

For American Airlines to take off again, we need capital to rotate back into small caps.

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And that brings us to the second potential culprit for the damage: the delta variant.

AAL Stock and Covid-19 Concerns

If the initial catalyst that brought buyers running into airline stocks was the arrival of a vaccine, then it makes sense that the delta variant and accompanying rise in Covid-19 cases could derail the optimism. Whether or not investors have gone too far in punishing American Airlines and friends in the wake of the surge remains to be seen. For its part, AAL stock is almost 30% off its 2021 highs.

Yet a third more immediate concern fueling the selling is the Fed meeting minutes, which revealed the monetary magicians at the U.S. central bank are looking to taper their asset purchases before year-end. While this is just the very beginning of tightening policy, the mere thought of it made more than a few traders panic. And their fear was most felt in smaller cyclical stocks. Like airlines!

News and narratives aside, it is the price chart of American Airlines that should speak the loudest. Let’s take a closer look at the recent damage and map out potential scenarios moving forward.

AAL’s Chart Is on the Ropes

American Airlines (AAL) weekly chart with support test.
American Airlines (AAL) weekly chart with support test.

Source: The thinkorswim® platform from TD Ameritrade

We’re starting with the weekly time frame because it nicely frames the significance of the current support test. The $18 to $19 zone has played an important role over the past two years. For half the time it acted as resistance, stymieing each advance and keeping a lid on the recovery. Then, when we finally blasted through it, its role reversed to support.

I’ll hasten to add that the rising 50-week moving average is also making an appearance in this area. Holding above it is required to keep the health of the overall weekly uptrend intact.

The daily chart adds a little more concern to the conversation in light of this week’s break of the 200-day moving average. The 20-day and 50-day are also coming down hard overhead. That said, we are down six days in a row and sitting at a major floor. If ever there was a time for bulls to unite, it’s now. If they fail here, it’s really difficult to entertain any bullish trades for AAL.

Action for Optimists

American Airlines (AAL) daily chart with break of 200 MA
American Airlines (AAL) daily chart with break of 200 MA

Source: The thinkorswim® platform from TD Ameritrade

If you want to take the more optimistic route and bank on American Airlines not falling too much further from here, then short puts offer a sizeable payday.

The Trade: Sell the September $16 put for 30 cents.

The initial margin requirement should be around $150, which gives you the potential for a 20% return if AAL stays above $16. If it doesn’t, you will be required to buy shares at a cost basis of $15.70, which could be a great price if airlines eventually recover back to their 2021 highs.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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