The Credit Card stocks ($MA and $V in particular) have been dead for the better part of this year, after last year’s spectacular run higher. This is completely natural and should not come as a surprise. Often times, after a large move, price will either consolidate via time or price, this is exactly what we have seen in $V and $MA this year.
The question everyone wants answered now is ‘When do they come back to life?‘ or ‘When should I buy them?‘
Sorry to ‘burst your bubble’, but no one can ever really know the answer to that question. The best we can do is analyze the risk to reward ratio and the probabilities associated with price patterns that have occurred over history.
In the case of $V and $MA, we will first cover the pattern:
$MA: A long base, getting ‘tight’ (price compression), just like physics, a compression always precedes an expansion (and vice verse). Now that $MA has consolidated so much and became so ‘tightly wound’, it is on my watchlist for a trade as I would like to capture that 3-10 day price expansion move that will occur next.
$V: Another long base and a similar pattern. An extreme price compression, likely preceding a large price expansion. Meaning, in human talk, it is (likely) going to move a lot, very soon.
Great. We have the pattern question answered, now our attention turns to the risk analysis side of the trade (more important side). The reason why traders often look for tight price patterns is not only because they offer explosive moves, but because they offer the best risk to reward when trading a stock as well.
$MA: In the case of this stock, it will either break up or down (of course), but no one know which way it will break. Some people, including myself, places probabilities on one way or another based a variety of factors (overall trend, volume, price candles, etc.). However, at the end of the day, it is unknown. So, let’s say (for educational purposes), you thought that $MA was going to break down from this price ‘base’ compression. In this scenario you would first need to define where you’re stop should be. A stop is simply a price level in which the thesis you had for the stock is proven wrong. For $MA (short), this would be above 77.50 as that is above the upper trend line and if price does happen to reach this level, $MA is likely ‘expanding’ higher out of the base. Same scenario can be said for if you wanted to purchase $MA, in this case the spot in which your thesis is wrong would be below 74.50 as this would mean the pattern is ‘expanding down’.
$V: Exact same analysis can be performed for $V. In this case, if your thesis was to sell this stock your ‘stop’ should be above 218.00. And, if your thesis was to purchase this stock, then your stop would go below 212.50.
When first learning the ends and outs of trading, this process can/may seem complex and overwhelming but let me assure you – the more you look at the charts, the more clear the patterns and the stop-loss levels become.
As always, if you have any questions or comments, please feel to reach out to via the Contact Page.