Presents the final entry opportunity

For a title that has led its competitors for so long, Southwest Airline NYSE:LUV He’s been having a hard time lately. While it managed to capture some of the gains that have hit stocks since November, this week’s 20% decline has erased much of that.

Coming at a time when indices like the benchmark S&P 500 or the tech-heavy NASDAQ are at all-time highs, it must be a bitter pill for investors to swallow. But for those of us on the sidelines, is a sneaky buying opportunity opening up? Let’s take a look, starting with the reasons for this week’s decline.

While Southwest shares have been selling off since 2021, the 50% rally they had been working towards from November until last week was starting to look like it might have enough momentum to turn the multi-year downtrend into a new multi-year uptrend. But an update last week from management has sucked the vitality out of that recovery rally, at least for now.

Negative revisions to key metrics

It all started with a downward revision to the company’s forward guidance for several key metrics, such as revenue per available seat mile (RASM). Having previously told investors they expected growth between 2.5 and 4.5%, Southwest now expects RASM growth to be between 0 and 2% for the current quarter. The company’s fuel costs per gallon also increased, as did its interest expense outlook. For a company that was working so hard to prove to the market that it was turning things around, this week’s update was a serious momentum killer.

It also didn’t help that, to top it off, Southwest now expects to report a net loss for the first quarter of the year. The shares dropped sharply on Tuesday and have not stopped selling since. But such was the strength of the decline, nearly 20% in just 4 days, that Southwest shares suddenly appear oversold.

Signs that the selling is overdone for Southwest stocks

This has already been noted by the folks at Argus Research, who upgraded their rating on Southwest from Hold to Buy following Monday’s update. They actually turned out to be quite bullish on the stock, pointing out that they’re not that negative on the company’s RASM prospects, and went so far as to increase their EPS estimate by 20%.

The team also set a new $40 price target on Southwest stock, which only became more attractive as shares continued to sell off in the days that followed. An expected rise of around 40% was expected at lunchtime on Thursday, which should be enough to tempt even the most risk-averse investors.

Southwest stock technical data supports the bulls

The argument for considering this as an entry opportunity is further strengthened by 2 key technical factors. The first is the fact that the stock is now back to trading at a decent support line around the $27 mark. This is where the bears lost momentum when trying to extinguish January’s year-end rally, and this should also prove to be a solid support line upon which to base an entry.

Second, the stock’s Relative Strength Index (RSI) is already at 25, indicating extremely oversold conditions, which can often precede a strong rebound. To put into context how steep this week’s sell-off was, it was just last week that Southwest’s RSI was bordering on overbought levels.

Conclusion

Investors should pay attention to signs that selling is losing momentum, such as a bounce off the lows towards a close or a narrowing of the daily range. If the bears can’t keep this going into next week, then the argument that this is an overreaction will gain even more weight. And with a $40 price target already out there, things could get interesting pretty quickly.

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