Is American Airlines a Buy After 46% Pullback?

American Airlines has been crushed from its recent highs, but that could be an opportunity. The charts shows the stock has potential support nearby.

American Airlines  (AAL) - Get Report has been a trading vehicle for a number of investors and speculators over the past few months.

Shares were obliterated as the coronavirus swept across the globe, shuttering businesses and nearly grounding airline traffic.

American Airlines came into 2020 under pressure already, but still fell more than 73% from its February high to the May low.

The stunning fall wasn’t reserved for just American, either. Delta Air Lines  (DAL) - Get Report, Southwest Airlines  (LUV) - Get Report and United Airlines  (UAL) - Get Report all felt the pinch too. It didn’t help that Warren Buffett was selling his firm’s stake in all four.

In any regard, the airline’s stunning decline enticed some investors to buy, even if the stock caught a $1 price target from one analyst.

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American went on to rally more than 170% in just a few weeks, rewarding speculators who bought low and sold into resistance. Now what?

Trading American Airlines Stock

Daily chart of American Airlines stock.

Chart courtesy of Stockcharts.com

On the daily chart above, it clearly shows American Airlines stock rallying up to the 200-day moving average, before being rejected from this clear level of resistance.

Since then, it has put in a series of lower highs, as downtrend resistance (blue line) squeezes the share price lower. Now though, down 46% from the June highs, bulls may have a solid risk-reward opportunity.

Specifically, American Airlines stock has corrected down to the 50-day moving average. Further, the $12.50 area was one of resistance for several months. Seeing this level act as support alongside a key moving average and amid such a swift decline would be bullish.

The reason the trade seems attractive though is the limited risk. A close below $12 is enough reason for bulls to cut their losses, as it becomes clear that support in theory is not support in practice.

If support holds, look for a move up through the 23.6% retracement, at $13.57. Above that puts downtrend resistance in play, followed by a possible test of the 20-day moving average currently near $15.40.

American Airlines stock may very well fail to put together a decent bounce, but the risk/reward is there for aggressive traders.

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