MasterCard Offers a Clear Technical Pattern In an Uncertain Market

Broadly speaking, there are two main groups of investors.  Those using fundamentals will analyze a company's business prospects, growth potential and financial structure with the hope of finding stocks that the market has mispriced.  Technical investors will rely upon chart patterns and trading activity to decide when to buy and sell securities. 

In the current bear market, both groups have faced problems determining the next move.  Fundamentalists have seen cheap stocks become even cheaper.  As they deployed capital, losses have mounted and frustration reigns.  With the large drop in stock prices over the past few months, technicians also find themselves in uncharted waters.  These investors find themselves looking back many years to determine what the next level of support should be.  While a down trending stock begs to be shorted, only the bold confidently sell stocks where moving averages and trend lines are far removed from the current price.

This lack of clarity would lead many investors to remain on the edges and refrain from assuming risk.  However, there is great opportunity cost with such a stance.  Instead, I prefer to find stocks with a downward bias that allow me to hedge my current portfolio yet offer the comfort of a clear technical pattern.  This search brings me to MasterCard (MA). As initially featured in my weekly newsletter here MA is a former market darling that has crashed to earth. 

When most felt the credit crisis was contained, MA was seen as a place to hide.  By acting as a transaction processor, MA assumes virtually no credit risk and earns a fee each time their card is used.  If consumer spending held, their business would continue to grow. 

This thought process led many momentum investors to pile into the stock and drove the price to an all-time high of $320 on June 2nd.  Since that point, a weak market and overvaluation have combined to drop the stock to the current price of $141.40.

The drop in price has resulted in a clearly defined channel that has held for over 4 months.  Currently, the channel shows MA trading between $130-150 over the coming weeks with a downward bias that should result in a new low.  At current levels, MA is approaching the top of the channel and offers an excellent time to initiate a short position with a clear technical pattern.

While I do not like jumping on trades that have moved this far in a short period of time, MA is unique.  The fact that the channel has persisted during multiple market rallies provides comfort.  Further, a well received earnings report two weeks ago pushed the price over $170 before resuming the downtrend.  Also, this latest failed rally was the third lower high since late September (9/19 - $225, 10/14 - $174, 11/4 - $170.  Lower highs are characteristic of falling markets and lead me to think MA may retest the October 27th low of $126.35.

Combining these observations, MA offers unique attributes in today's market.  It faces economic headwinds that will restrain business growth, trades in a clearly defined downward channel and has been showing technical weakness with a series of lower highs.  Therefore, I view it as an ideal short sale candidate.  If the general market continues lower, we profit.  If the technical pattern holds, we profit.  Given the uncertainty in this market, I welcome the opportunity to trade with clear patterns and defined fundamentals.

Comments

[leh:]

BIDU and SOHU have been in similar very tradeable downward-biased channels for months--at least until BIDU blew up to the downside this week on bad news and plummeted close to $100, somewhat below the channel. After this selloff settles, I'd expect to see the channel to resume, though it may well be a broken stock if it continues to show weakness into next week.

2008 Nov 20 08:52 AM