Airline Stocks Flying on Cloud Nine

Investors who held on to airline stocks through the mid-October broad market sell off are likely grinning with delight this holiday season. After all, the airline sector's comeback story on Wall Street has been all the buzz, largely driven by forecasts that the industry has the third highest long-term growth potential.

In this case study, we'll take a look at Delta Air Lines Inc. (NYSE: DAL) and American Airlines Group Inc. (NASDAQ: AAL) and the staggering rise in both stocks over the past two months. Now trading at cloud nine price levels, we will address the question of whether turbulence may lie ahead for these household names and sector leaders.

$DAL : Delta Air Lines Inc. ; $AAL : American Airlines Group Inc.

As the daily chart above reflects, DAL and AAL have maintained a steadily rising price channel when applying a linear regression analysis of 180 trading sessions in duration.

In defining the time frame as such, we are accounting for roughly nine months of trading activity, thus reflecting the mean price that the underlying security has traded at (middle line) as well as two standard deviations above and below that price level (purple and orange regions).

Since mid-October, both DAL and AAL have rallied hard off of their lows and gained a jaw dropping amount in value. In both dollar and percentage terms, AAL is the standout leader, having traded as low as $28 in mid-October and just recently breaching the $50 level, a gain of over 80%.

For both stocks, +DMI remains above -DMI on the daily time frame, so the bulls are still in predominant control. -DMI has crept up slightly in recent weeks, so the bears are beginning to take notice of potential exhaustion in the bullish run over the short term.

RSI levels for both stocks remain above 60, so the bias is to the upside until proven otherwise via the price action. In yesterday's trading session, both stocks pulled back to their 10 DMAs, with DAL closing roughly fifty cents above it ($46.33 close versus its 10 DMA at $45.74), while AAL managed to close just a few dimes above it ($48.31 close versus its 10 DMA at $48.14).

Notice that both stocks are showing signs of stalling out as they push the upper limit of their long-term linear regression channel. A retrace to or below the mean line for both stocks may be in play if the bears pick up the pressure over the coming weeks.

Given the significant gains that both DAL and AAL have seen in such short duration, profit taking may be expected before further buying interest is spurred to compel the next leg up. The trend is up so long as the 10 DMA stays above the 21 DMA; a sustained cross of the 10 DMA below the 21 DMA would be a cautionary signal for the bulls.