David England: Taking a closer look at credit card companies
Column | Eye on the Market

David England: Taking a closer look at credit card companies

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With the current economic environment, many people are interested in trading credit card companies. So, today, let's answer questions on the sector, then evaluate potential opportunities with the top U.S. credit card companies.

To answer, I designed this systematic approach that can be used with any sectors. Step 1: Identify the top U.S. credit card companies. Step 2: Determine the relative strength and performance of each company. Step 3: Evaluate which companies are the strongest and the weakest versus the performance of the overall equity market. Step 4: Identify potential buy or sell signals with the companies.

In Step 1, the top credit card companies are Visa, Mastercard, American Express, Capital One Financial Corporation and Discover Financial Services.

To accomplish Step 2, I designed a chart with the time frame of Jan. 1 to date. The credit card company name, performance and symbol are as follows: Visa, -8.55% (blue line), Mastercard, -10.77% (red line), American Express, -29.03% (green line), Capital One Financial, -38.30% (purple line) and Discover Financial Services, -52.71 (black line). The performance of the market (SPX) during this period is -10.78%.

Major Credit Cards

Moving on to Step 3, Visa and Mastercard are currently outperforming the market (SPX). American Express, Capital One Financial, and Discover are underperforming the market (SPX).

And, with Step 4, since many readers are value buyers, I will evaluate trading opportunities with the laggard of the group, Discover Financial Services (black line).

To help understand a sell signal application, I designed a custom chart for Discover, (symbol DFS) and includes the following: Timeframe-daily, 30 Simple Moving Average, Chaikin Money Flow using a 20 setting, MACD Histogram and volume with a simple moving average of 20.

Discover Financial

For a Simple Simon buy Signal to be generated, all of the following must happen:

• The price must also be trading above the short-term trend line.

• The price must be trading above the 30 Simple Moving Average-blue line.

• You must have green Chaikin Money Flow (CMF) bars growing larger in three consecutive days.

• And, finally, the volume needs to spike over 20% of the average daily volume. Confirm all of the above with the MACD Histogram, crossing from negative to positive territory.

As you can see (point A), a Simple Simon buy signal has not been issued. Why? Although the price is trading above the 30 simple moving average, it is trading above the short-term (black-slotted line) trendline. While the MACD is trading positive, there has not been three increasing (green) Chaikin Money Flow bars. Finally, the volume is trading below the moving average.

For those asking if an official sell signal was issued before the huge price drop, let’s review. For a Simple Simon Sell Signal to be generated, all of the following must happen:

• The price must also be trading below the short-term trend line.

• The price must be trading below the 30 Simple Moving Average.

• You must have red Chaikin Money Flow (CMF) bars growing larger in three consecutive days.

• And, finally, the volume needs to spike over 20% of the average daily volume. Confirm all of the above with the MACD Histogram, crossing from positive to negative territory.

In December 2019, the price dropped under the short-term trendline and below the 30 Simple Moving Average (point B). After three days of increasing red Chaikin Money Flow bars along with a negative MACD and 20% higher selling volume (red bars), an official sell-signal was issued. Later in January, the price rallied above the trendline, but was not confirmed by the other indicators.

Once the sell-signal was generated, DFS fell more than 70% before recovering in March 2020. Those locking in profits before the price plummeted were glad they did and those shorting during this timeframe had very profitable results.

Here are the key points to consider: I designed this systematic approach to evaluate opportunities with other sectors and companies. Simply plug in your symbols into the chart templates then use the step by step analysis above.

Once a Simple Simon buy or sell signal is issued and the security is bought or sold, protective stops are a must. This system took a couple of years to develop. Don’t think you will be able to master it overnight. The problem is many try to make it more difficult than it needs to be.

If you have questions or ideas for future columns, please contact me at the email address below.

Plan your work, work your plan, and share your harvest!

DAVID O. ENGLAND is an investor/trader, financial analyst/educator/lecturer and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Past performance does not dictate future returns. Questions? Send to thetraderseye@gmail.com. Full Disclosure: The author does not own any securities in this column.

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