Southwest (LUV) Looking for a Boost on Earnings

Shares of low-cost carrier Southwest Airlines Co. (LUV) have doubled in price from their pandemic lows, but prices have now formed a bullish corner pattern, signaling the potential for a strong breakout in the coming weeks. On the graph below you can see the red line of resistance and green support line shrinks as we enter 2021.

Southwest Airlines is expected to report fourth quarter results before market open Thursday, Jan. 28. This could be exactly what the stock needs to break out of this price pattern. Here’s what to watch.

What to watch with LUV

The stock is trading right at the green support line on the chart. It wouldn’t need to drop much on profit to quickly break that key level and fall from there.

However, Southwest has upside potential here. Stocks could rise 10% on earnings and remain stuck in this wedge pattern, depending on the position of the red resistance line. We would have to do better than that to come out on the rise.

What’s really interesting is that the market only expects a 2% change in earnings. That might be enough to keep the stock trending lower, but it creates a chance for an upside surprise. A 10% move merely retraces the price action of the past week and a half. It’s nothing these days.

The chart shows us that a breakout is imminent, but the market doesn’t think that will happen when the company reports earnings. If the earnings don’t shock the markets, the stock could hold steady and slowly climb higher in this rising wedge pattern.

The essential

The upcoming earnings for Southwest could be the push the stock needs to break out of a rising wedge pattern. However, the market does not expect it, which could create a nice surprise after the earnings. If the market reaction to earnings is flat, we should expect the stock to move higher in this wedge formation until we get a break above or below key levels.