Shares of American Express are at a critical level that I think we need to be watching. This company is a component of the Dow Jones Industrial Average as well as a top 10 holding of the S&P Financial Sector. Not surprisingly, American Express historically has a very high positive correlation with the overall US Stock Market. We’re talking about a stock with a 0.97 correlation coefficient over the past 5 years and a 0.93 over the past 3 years. Go back even further and you will consistently find numbers close to 1. Therefore I think this is worth watching for many reasons, even if you’re not trading the stock itself.
Let’s start from the top/down. The first chart represents the monthly bars going back to the 90s showing prices last year exceed the upper end of a trendline connecting two very important peaks in 2000 and 2007. What concerns me here is that to start 2015, prices have now broken back below those key levels, leaving all of the new longs essentially stuck up there in what is potentially a failed breakout. Not good:
Next we’re looking at a weekly candlestick chart going back to the start of an important rally in October of 2010. I believe this is the key trendline that we need to be watching. This also currently represents former resistance in the summer of 2013 that served as support last October. A break below the uptrend line (blue) as well as key support (gray) could prove costly to this stock bigger picture:
Finally here is the shorter-term daily candlestick chart showing a big rounding top being put in over the past 2 years or so. These tend to be distribution patterns that could lead to a major sell-off, but sometimes can serve as an excellent buying opportunity (See: The Epic Squeeze US Dollars Just Began: May 12, 2014). The way I see it, if prices can hold on to this key support and dig in here, there is no reason to get short. I think for now we can potentially see a nice mean reversion back towards 87 where we find a downward sloping 200 day moving average (red) where I would be taking tactical profits on any longs:
Risk management-wise, if the February lows start to break, there is no reason to be long. Looking at the monthly chart and the weekly chart, we know this is a critical level. If that breaks, we could be in store for some aggressive selling and if our correlations continue to play out, it should put some downside pressure on the market overall. I would argue that if AXP can hang on to this support, it would be a positive for the market as a whole. Therefore I think this one is worth watching for many reasons.
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