Southwest Airlines Stock Up 5% in October – Time to Buy LUV Stock?

The price of Southwest Airlines stock has gone up 5% so far since the month started as the sector continues to recover from the hit it took in the past few months amid a significant spike in the number of daily virus cases in the United States.

Data from Worldometers shows that this latest wave of contagions in the North American country may have already reached a peak upon hitting a 7-day average of around 167,000 cases back in late August to then progressively decline to the current level of around 82,000 cases.

However, despite this latest advance, some headwinds are weighing on the short-term outlook for LUV stock including the sudden cancellation of a large percentage of flights this week.

This weekend, Southwest Airlines cancelled approximately 1,800 flights within the US amid bad weather and air traffic control issues. Meanwhile, rumors have been circulating about pilots going on strike after the company stated that it would make vaccinations mandatory for its staff.

However, these rumors have been discredited by both the airline’s top executives and representatives from the Southwest Airlines Pilot Association (SWAPA) – the company’s union.

Moreover, jet fuel prices have been steadily increasing so far this year as a looming energy crisis is pushing the price of crude higher at an alarming pace. According to data from the International Air Transport Association (IATA), the price of jet fuel has surged to its highest level since October 2018.

Could these two developments weigh on the price of Southwest Airlines stock in the short term? In the following article, I’ll be assessing the price action and fundamentals of this airline stock to outline plausible scenarios for the future.

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Southwest Airlines Stock – Technical Analysis

The price of LUV stock had been on a sharp downtrend since May this year as the appearance of the Delta variant in multiple corners of the world threatened to prolong the disruptions caused by the virus on air traffic volumes.

This sustained decline led to the formation of a falling wedge – a pattern that is typically considered bullish and that was already broken in mid-September during multiple high-volume trading sessions.

Now, the price has advanced above its short-term moving averages as the government has kept pushing the population to get vaccinated. This break has been accompanied by a golden cross (another bullish signal) as well while momentum oscillators have been steadily surging to bullish territory.

Currently, the Relative Strength Index (RSI) has moved to its highest level since April this year. That said, even though the MACD is on an uptrend, positive histogram readings have been steadily declining while the oscillator has dangerously approached the signal line.

This could be signaling that the positive momentum the stock has experienced lately could be fading and this may lead to a sizable short-term decline in LUV stock.

So far today, the price is declining 3% in pre-market stock trading action. Moving forward, as long as the stock’s short-term moving averages hold up, the outlook for Southwest Airlines stock would remain bullish. However, if the stock breaks below these thresholds, chances are that the uptrend may reverse on the back of the negative developments mentioned above.

Southwest Airlines Stock – Fundamental Analysis

According to data provided by Southwest, fuel costs accounted for 24.6% of the company’s total operating expenses back in 2018. However, total expenditures were quite higher back then as sales volumes were not affected by the pandemic.

That said, it is plausible to think that fuel costs will remain an important component of Southwest’s direct costs in the future and the fact that the price of crude has continued to rise – and is expected to keep rallying during this fourth quarter – may affect the short-term financial performance of the firm.

Southwest Airlines is scheduled to report its financial results covering the third quarter of 2021 on 21 October and any negative surprises on the earnings front resulting from these higher fuel prices may affect the performance of the stock in the short term.

Moreover, if these latest flight cancellations continue to occur in the following days, that could also weigh on the airline’s valuation as sales estimates would be revised lower.

All in all, this week’s price action may signal the extent to which the market is worrying about these headwinds. If the price declines below its short-term moving averages, the outlook for the stock from both a technical and fundamental perspective would be bearish unless this upcoming earnings report delivers the kind of surprise that can turn the tables for LUV stock.

However, such a positive surprise seems highly unlikely upon considering the multiple headwinds the company is experiencing.

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