One of the beneficiaries of lower crude oil prices has been airlines companies, as evidenced by the $XAL Airline Index.  Let’s take a look at these developments and what’s happening to the Airline Index right now.

$XAL Airline Index Weekly:

The index is currently testing against overhead resistance via the flattening 50 week EMA, but there’s a multi-swing positive momentum divergence that has been building almost for the entire duration of 2008.  Price is consolidating currently, coming off a pervasive and destructive downtrend.  Although we’ve established higher lows, we’ve yet to establish an official ‘higher high,’ and so the official trend remains down until price can break above the weekly 50 EMA and form a higher high.  Until then, we’re in ‘no-man’s land’ until we get that higher high… or price fails and forms a lower low, reconfirming the established downtrend.

Also, notice that the $XAL has been showing relative strength to the S&P 500 since July when Crude Oil topped above $140 per barrel (which was devastating the airlines due to high fuel costs).  Though price is not making a series of higher highs and higher lows, the Relative Strength line is doing so, hinting at underlying strength perhaps yet to come.

One has only to imagine the price hikes and fare increases the airlines set in place as a necessity to combat higher fuel costs remaining in effect after the price of fuel has fallen dramatically - it’s like a double blessing to cash-strapped airline companies, adding a little fundamental strength to the developing technical picture.

Let’s look briefly at a comparison of Crude Oil prices and the $XAL itself - it’s almost a full inverse relationsihp… almost.  Keep in mind that the weakening economy is somewhat decreasing commercial and personal travel.

$XAL Airline Index Weekly compared to Crude Oil:

The airlines continued down while crude continued up… then in July 2008, the trends were reversed, though only to an extent.  Again, a weaker economy put pressure both on company stock prices and ticket sales in the form of reduced passengers - that’s one reason the relationship has not continued strictly inversely to the present.

Still, lower (in this case, drastically lower) fuel costs have a bullish result on company prices, which may be a reason these companies are showing relative strength to the S&P.  For sustained bullishness to return, we’d need to see a break above the $25 level in the $XAL, along with corresponding strength in many of the key stocks that make up the index.