Last month, airline stocks seemed to be on the verge of reversing their bearish 2015 trends. In fact, up until then, the entire transportation sector was still trapped in a disastrous decline, so airline strength offered the first ray of hope for the group all year.

United Continental Holdings (NYSE: UAL) was a prime example of the attempted bullish reversal as it broke through the declining trendline from its January peak. The day of the breakout, the stock moved up more than 6% on heavy volume in a classic technical move.

But just one week later, UAL was trading back below that trendline in an equally classic technical failure. The bulls seemed to flame out as demand withered. Shares began to fall under their own weight as whatever buyers there were could not absorb the supply offered for sale.  

But this was more than a failure to hold a trendline breakout. It was also a failure to hold a breakout through the top of the May-to-September trading range, which is now likely to break to the downside.

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In technical analysis, the more features that are broken to the upside on a breakout, the stronger that breakout becomes. Conversely, the stronger the failure to hold a breakout, the sharper the decline still ahead is likely to be. 

I also like that the stock bounced when it got to the bottom of the range a few days ago. This allows bearish excesses to dissipate so that a move below that level will be the result of a true increase in selling pressure and not just a momentum-based overshoot. And from the fundamental side, the recent firming in oil prices provides a reason for investors and traders to sell this stock and confirm the official technical breakdown. 

We can forecast a downside target by measuring the trading range and projecting that height down from the breakdown point. However, because the percentages are rather large, I like to use a log scaled chart to avoid being too aggressive with downside targets. 

Instead of measuring the height of the trading range in points, I measure it physically on the chart. Whereas the downside target for the breakdown might normally be set at $42 or less using the traditional method, my downside target is a bit higher at $43.50.

Both targets are in the vicinity of support from the start of a nice rally leg one year ago. Momentum, cumulative volume and trend indicators are all weak, so the 14% projected gain on a short trade is not out of line.

Recommended Trade Setup:

— Sell UAL short at the market price
— Set stop-loss at $53.25
— Set initial price target at $43.50 for a potential 14% gain in four weeks 

Note: If you want to bet on a drop in UAL without taking on the risk of shorting shares, there is another strategy that could allow you to make a 68% profit on a 14% drop in the stock. And you only stand to lose less than $1,000. To find out how that is possible, follow this link.