AIR: Prone to downdrafts

AAR Corp. (AIR) is huge service and parts department for aircraft, civilian and military. It performs maintenance and overhaul, and provides parts supply services.

It also sells and leases aircraft. It does all of these things amid a huge set of regulations designed to keep those complex flying beasts safe and airworthy. It's a complicated business with a limited market. I mean, how many of us own our own planes?

The Wood Dale, Illinois company this spring fell from favor among analysts and traders. AIR had the most bearish chart among 34 stocks added today to the Zacks top-sell list.

A glance at the five-year weekly chart for AIR shows that the company's stock has long been prone to down-drafts. It doesn't just correct. It slams down form the heights to the valley floor.

The most recent slam-down began March 20 from $21.98 and hit a correction low on Monday of $15.81. The downward course included one short pause for a slight upward correctoin, but three opening downside gaps.

So this is serious downtrending. The only question remaining is, where's the ground?

And the ground, in fact, may not be that far away. The $15 level has seen two major bounces to the upside, one in the summer of 2011 and a second in early October 2011.

Also, there was a sharp bounce upward from $15.78 in late November 2011.

So if these powerful resistance levels still hold, there may not be that much downside left for AIR. Unless, of course, there is. The validity of resistance is something that can only be assessed after a bounce or breakout has occurred.

The bounces that have occurred between $15 and $16 have happened rapidly, as violent reactions against further decline.

Under those circumstances, opening a bear position and setting close stop/losses to avoid a bounce may not be a viable strategy. The stop/loss may kick in well above the level the trader planned on.

AAR Corp. has return on equity of 9%, with long-term debt amount to 67% of equity.

The company showed a profit last quarter after three losing quarters. Prior to that, it profited in seven out of eight quarters.

Despite the falling chart and the less-than-spectacular return on equity, institutions have piled into AIR. They own 90% of shares. The price is among the lowest I've seen. It takes only 32 cents to control a dollar in sales.

AIR trades 360,000 shares a day on average. That supports only a small selection of options. Yet bid/ask spreads are fairly narrow, and open-interest is in the two- and three-figure range.

Implied volatility stands at 41%, near the six-month low. Options traders are pricing in a 68.2% chance that the price will close between $14.13 and $17.87 a month from now, for an 11.7% maximum gain or loss.

AAR Corp. next publishes earnings on July 9. The stock goes ex-dividend on April 27 for a quarterly payout yielding 1.88% annually.

Decision for my account: I would want to see a break below the latest bounce level of $15.78, and better still, below $15, before opening a  bear position. So, I'll pass on AIR today.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.