Panic Selling Makes This Airline Stock Ripe For A Quick 10%-Plus Pop

If there ever were a teaching moment in the stock market, it was this week. Earnings, trendlines and whizbang strategies take a backseat to sentiment when fear in the market turns to panic. But to paraphrase Warren Buffett, when everyone is fearful perhaps there is an opportunity to be greedy.

Airline stocks took a big hit as two health care workers treating the country's first Ebola patient also contracted the disease. It was not that these workers caught the deadly virus while flying, but that one flew in a regular passenger jet just a day before showing symptoms. Suddenly "everyone" thought that flyers are at risk and airline profits would nosedive.

I cannot address the health concerns, but when I see a stock such as Delta Air Lines (NYSE: DAL ) down more than 20% in just the past few weeks, I tend to believe the selling is overdone. That can be an opportunity to play the rebound.

Be careful to note that I am not looking for the start of a major bull run, as this chart is not very different in form, aside from its extreme sentiment, from the market itself. The 2012 rising trendline is broken to the downside, and support from summertime lows has been pierced, just as the S&P 500 has done. But unlike the S&P 500, my observation is that the panic was heading toward levels seen after the 9/11 terror attacks.

There is no doubt Delta and its peers are extremely volatile at this time. Trying to catch day-to-day changes is not for the faint of heart and can easily result in big losses. However, looking at the bigger picture could provide some nice returns for those who can handle the risk.

Thursday before the bell, Delta announced earnings and revenue that were above analysts' expectations, and the stock responded with a nice rally.

Even a technical analyst such as me can appreciate a trailing 12-month price-to-earnings (P/E) ratio of 2.6. Such a low ratio does spark a skeptical look as it may be too good to be true, but my preliminary research shows this to be a company that is not in any immediate financial danger. The airline said it expects to sees solid operating margins for the fourth quarter. It is risk that is keeping the P/E ratio low, and I do not think DAL deserves the treatment given to it in the market.

DAL Stock Chart

On the chart, we can see support from the April low in the $30.80 area, and even though the past week was volatile, buyers seemed to come back in whenever that level was penetrated to the downside. I won't formally label any bullish reversal patterns here, but beneath the surface there are some positive changes to note.

On-balance volume, which keeps a running tab of volume on up closes minus volume on down closes, has been rising on hourly charts since the Oct. 13 low. And though it's hard to believe, airline stocks have held up better than the S&P 500 all week. Of course, the reason stems from their prior price decline, but the point is that sellers have turned their attention to other parts of the market.

Again, I am not looking for a home run here, but a single or double looks possible. It will require that the market prove it is ready to move higher and end its week-long highly volatile phase with a breakout. If that happens, a run back to the 50-day average, now just above $37.50, is possible.

Recommended Trade Setup:

-- Buy DAL above $33.73

-- Set stop-loss at $32

-- Set initial price target at $37.50 for a potential 13% gain in three weeks

If the importance of reading past the panic caught your attention you should look into the secret indicator that has tipped off investors to stocks that generated 44% in six weeks... 53% in eight weeks... and even 83% in just four weeks. It's called the 'Alpha Score,' and you can get the name of a new stock flashing "buy" here .

This article originally appeared on Panic Selling Makes This Airline Stock Ripe for a Quick 10%-Plus Pop

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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