DailyPlay – Southwest Airlines Co (LUV)- September 27th, 2021

Market Outlook:

Equities ended last week on a positive note after suffering losses earlier in the week in relation to the Evergrande crisis. Despite the strong rebound last week, rates continue to rise and the rise in the dollar index (DXY) indicates that risk sentiment is fading as the Greenback remains in consolidation just below the $93.50 resistance level. Sector leadership remains narrow with only Energy and Discretionary in the leading categories. 8 of the 11 SPDR sectors are showing low momentum with 5 of them already in the lagging category. Bonds sold off after the Fed announcement last week with the 20+ Year Treasury Bond ETF (TLT) ending the week 1.52% lower. This week should paint a clearer picture of where equities are headed next and whether a “risk-off” environment may come into play.

LUV Bullish Trade Idea:
Our bullish trade is Southwest Airlines Co (LUV). After a multi-month decline and consolidation period, LUV experienced a strong uptick in momentum on both the daily and weekly timeframes. Price broke above the $52.14 resistance level after a bottoming formation at $47.50. This comes after a strong rotation back into travel stocks last week. From a fundamental perspective, LUV has the best balance sheet in the airline industry and even has a net negative debt position, a strong contrast to its highly leveraged industry peers. LUV is the best-positioned airline stock for a reopening play. 

As this is a Debit Spread, look to take profits at 75%-100% gain and cut losses at 50%:

Take Profit: $4.55 – $5.20 Credit

Stop Loss: $1.30 Credit

Sector Outlook

The Relative Rotation Graph (RRG) for sector rotation indicates that a narrowing sector leadership with only 5 sectors in the Improving and Leading categories and 6 sectors in the Lagging and Weakening categories.

Leading (positive relative trend and positive relative momentum): Discretionary and Energy are in the Leading category. Energy is showing strong momentum and relative strength while momentum in Discretionary is declining. 

Weakening (positive relative strength and negative relative momentum): Real Estate and Technology are in this category. Both sectors are exhibiting poor momentum and relative strength. This could lead to both sectors moving into the lagging category this week. 

Lagging (negative relative trend and negative relative momentum): 4 sectors are in the lagging category – Utilities, Materials, Communications and Healthcare. All sectors have declining momentum. Look for further weakness in these sectors this week. 

XLP

Defensive sectors continue to exhibit weakness with Staples breaking below the 100 D MA and failing the retest on multiple attempts last week. This indicates a move lower. Next support is at $68.80. 

XLE

The Energy sector broke above the $50.50 resistance level mentioned last week and is now testing the 100 D MA. Price formed an inverted head and shoulders pattern on the daily chart. Strong momentum and relative strength could see the sector break above the 100 D MA and start an uptrend back to $55.