For a stock that has led its peers for so long, Southwest Airlines Company (NYSE: LUV) has been having a tough time recently. While it was able to catch some of those gains that have been sweeping across equities since November, this week’s 20% drop has given up much of those. 

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

While Southwest’s shares have been selling off since 2021, the 50% rally they’d been working on from November through last week was starting to look like it could have enough momentum to turn the multi-year downtrend into a fresh multi-month uptrend. But an update this past week from management has sucked the life out of that recovery rally, for now at least. 

Negative Revisions to Key Metrics

It 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 it to grow between 2.5-4.5%, Southwest is now expecting its RASM growth to land somewhere between 0-2% for the current quarter. The company’s fuel costs per gallon were also increased, as was 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 all off, Southwest is now expecting to deliver a net loss for the first quarter of the year. Shares gapped down hard on Tuesday and haven’t really stopped selling since. But such has been the strength of the fall, almost 20% in just 4 days, that Southwest shares are suddenly looking way oversold. 

Signs That the Selling is Overdone for Southwest Stock 

This has already been picked up by the guys over at Argus Research, who upgraded their rating on Southwest from Hold to Buy in the aftermath of Monday’s update. They actually came out quite bullish on the stock, noting that they’re not as negative on the company’s RASM outlook, and they went so far as actually to boost their EPS estimate by 20%. 

The team there also put a fresh $40 price target on Southwest shares, which has only become more appealing as the stock has continued selling in the days since. As of lunchtime on Thursday, that was pointing to a targeted upside of some 40%, which should be enough to tempt even the more risk-averse investor. 

Southwest Stock Technicals Supporting the Bulls

The argument for looking at this as an entry opportunity is further strengthened by 2 key technical factors. The first is the fact the stock is now back trading at a decent support line around the $27 mark. This is where the bears ran out of steam when they tried to snuff out the end-of-year rally back in January, and it should prove a solid line of support to base an entry around this time too. 

Secondly, the stock’s relative strength index (RSI) is already at 25, indicating extremely oversold conditions, which can often precede a sharp bounce. For context on just how steep this week’s selloff has been, it was only last week that Southwest’s RSI was verging on overbought levels. 

Conclusion

Investors should watch for signs the selling is running out of momentum, such as a bounce off the lows into a close or a narrowing of the daily range. If the bears are unable to keep this up until next week, then the argument that this is an overreaction will gain even more merit. And with a $40 price target already being floated around, things could get interesting pretty quickly.