American Express Defined-Risk Short-Side Setup

Global payment and travel firm American Express Company (AXP) has participated nicely in the year to date rally, as its stock is 23% higher since the beginning of the year.  While the stock’s longer-term charts still support higher prices over time, last Friday’s price action favors the odds for a short-side mean-reversion trade with clearly-defined risk.

On the multi-year chart below, looking back to 2011 note that  from November 2011 to May 2012 the stock rallied just about 17 points.  After consolidating for the ensuing six months, the stock then formed a double bottom with its low in November 2012 from which it launched a significant rally.  As of this past Friday May 3rd, American Express Company (AXP) has again rallied 17 points, in other words matching the point streak of the aforementioned  2011 – 2012 rally.

Also important on the longer-term chart is the stock’s breakout past a line of resistance in early January 2013.  The stock eventually retested the breakout area in late January before powering higher into May.  Given this critical breakout, the stock is likely to remain above the breakout area on any potential weakness in coming weeks.

axp multi-year

Besides sporting a notably steep slope, the stock is also significantly extended beyond its 200 day simple moving average (red line).  At last Friday’s highs the stock was trading 19% above the moving average, which by historical measures is well extended for the stock.  Last Friday the stock, which had already rallied sharply in recent weeks, gapped up at the open, rallied higher but closed well off the intraday lows.  The daily candle left behind is a so called shooting star candle, which flashes a bearish warning sign.  As a swing trader, for me this now sets the stock up for a good risk/reward trade to the short side.    As long as the stock does not trade above last Friday’s highs near $71.10 (where I am placing my stop) on a daily closing basis, odds now favor the stock to move lower by around 5%.

AXP daily chart



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