Why I'm Shorting Visa

When I study charts in order to make trade recommendations for EPIC Insights, I look for a few basic ingredients. Trends must be well established so that their continuation or reversal is clear. Also, price targets must be observable. Finally, volume at key turning points helps to establish the validity of moves.

While such a recipe may seem easy to follow, I rarely find stocks that show all three key attributes. When I do, I must take action as such opportunities often disappear quickly.

This week I have identified a stock that has the traits I seek-Visa (V). V has long been favored by the momentum crowd. Seen as a safe place to hide during the financial crisis, the stock benefited as global expansion and higher credit card acceptance provided tremendous tailwinds to its business. As V's prospects improved, the stock bottomed well before the broad market and rallied over 75% from its February low to its May high.

Now that move appears to be over as the stock has fallen from its recent high. The uptrend which had guided prices higher since February (black line) has now been broken. A general rule is the longer a trend remains in place, the more substantial it is. Therefore, when a long-lasting trend is broken, we should expect dramatic moves in the opposite direction.

Adding to the possibility of a sharp move from the trend reversal is the fact that the moves lower occurred on heavy volume (blue arrow).

Expecting lower prices, we now look for a price target. The immediate price would be the support level at $60 (blue line). With a move off the recent high, this support level should stop any subsequent decline and offers a reasonable intermediate price target.

With a bearish technical pattern and an immediate price target calling for a 10% decline, V offers an excellent bearish trade. I will seize this opportunity and recommend shorting V as this week's technical trade.

Comments

[ScroogeMcduck:]

Shortting visa? because your chart analysis says so. I dont see this as a good trade at all. Visa has one of the best business models in the game with unlimited growth this is just a correction. If it comes near 60 im a buyer and im sure there are plenty of people waiting to pounce on this one as well. Good luck

Jun 16 09:39 AM

[169757:]

Shorting Visa based on charting is a foolish way to lose your money. Visa's fundamental and business model are really solid. As the economies here in the US and globally are mending, Visa share price will take off. Please do not publish your non-sense analysis.

Jun 16 09:52 AM

[j_remington:]

Visa stock - a bearish option strategy perhaps at best

Jun 16 09:57 AM

[MoMoneyG:]

Visa is overpriced based on the suggested 2010 earnings. My crystal ball suggest $56 range is the upper range. I am not a buyer at the current prices.

Jun 16 10:00 AM

[Graham and ...:]

Short Visa and AXP (I'm about to, or buy puts), as soon as the rally ends. After the housing bust, consumer credit is the next shoe to drop.

Jun 16 10:06 AM

[PlanetHead:]

I rather short mastercard....

Jun 16 10:10 AM

[FiaPoko:]

Unlimited growth?

Your unusal ideas intrigue me and I would like to subscribe to your newsletter.


On Jun 16 09:39 AM ScroogeMcduck wrote:

>... Visa has one of the best business models
> in the game with unlimited growth this is just a correction.

Jun 16 10:14 AM

[TurtleTrader72:]

I strongly believe that the financials (inculding Visa) will ultimately test their lows at some point in time in the future. Referring to the chart above, traders and investors should notice the 'reversal gaps' created when the stock reversed off its lows in the low 40s. From a chartists perspective, chart gaps tend to represent emotional and/or excessive trading practices and almost always get 'filled in' in the form of a retracement back to those levels. Traders and investors should notice that these 'reversal gaps' can be found in many financial stocks inculding the ETF XLF. Over the years, I have come to view chart patterns as a visual representation of the collective psychology of investors and traders. They help provide insight into the actions (not opinions) of investors and help us focus on what they are doing rather than what they are saying. From my experience, charts gaps are very powerful indicators of excessive and emotional trading and indicate that there is a high probability of a retracement back to those levels at some point in time. I would be cautious with any financial stock over the short term. I hope this help!

Jun 16 11:05 AM

[2 thou at t...:]

I like the Visa short. With the oligopoly Visa and MasterCard have going, it is just a matter of time until others enter their space. The timing is ripe - Vendors are getting squeezed with transaction costs, but have no alternative.
I think a major cellular company is going to announce transaction processing cell phones in the next 6-12 months. Japan has been doing this for years. Consumers just want convenience, and this will provide it... Short Visa/Mastercard, long Paypal (ebay). Look for the rumors to start soon on cellular transactions... where there is smoke their will be fire... ...in the form of V stock certificates

Jun 16 11:10 AM

[ScroogeMcduck:]

Yes unlimited growth, think of all the countries that still only use paper currencies eventually there will be no need for paper. Mastercard and visa's duopoly will continue to benifit them.

Jun 16 11:18 AM

[1345:]

Well if you look at the charts plus this news
"U.S. credit card defaults rose to record highs in May, with a steep deterioration of Bank of America's lending portfolio"
Then maybe he has a point

Jun 16 11:47 AM

[Windsun33:]

Visa could care less how many cards default, they are not a financial. And they also get paid for processing debit cards, which now are over half the Visa transactions.


On Jun 16 11:47 AM 1345 wrote:

> Well if you look at the charts plus this news
> "U.S. credit card defaults rose to record highs in May, with a steep
> deterioration of Bank of America's lending portfolio"
> Then maybe he has a point

Jun 16 11:55 AM

[Graham Jervis:]

Just out of curiosity, has anyone looked at the correlation to VISA's stock price and Gold? i know visa has been trading for a short period, but i was just curious if anyone noticed a correlation.

Jun 16 12:39 PM

[Sean Hannon:]

Per Bloomberg, Visa has a beta vs gold of -.3 and an r-squared of .038.


On Jun 16 12:39 PM Graham Jervis wrote:

> Just out of curiosity, has anyone looked at the correlation to VISA's
> stock price and Gold? i know visa has been trading for a short period,
> but i was just curious if anyone noticed a correlation.

Jun 16 01:41 PM

[Just Say Whoa!:]

>Yes unlimited growth, think of all the countries that still only use paper currencies eventually there will be no need for paper.

But not everyone in the world WANTS unlimited growth in consumer credit card fueled debt.

In France, almost nobody uses plastic. It's there, it's available, but due to cultural bias, is unwanted.

"Unlimited growth?"

In your former position, did you rate Credit Default Swaps as "risk free"?

Jun 16 02:55 PM

[Tech_analyst:]

Many times you have said something, 90% has been wrong, this one is definitely wrong.

Jun 16 04:17 PM

[Fighting Yoda:]

Visa despite not being vulnerable to defaults is vulnerable to slow downs- the card issuance and usage is down. The issuers are also negotiating for lower processing charges from Visa and MA.

Shorting is not what I would recommend based on technicals, but will definitely not go long.

Jun 16 05:57 PM

[Tahoe00:]

Sean, you have been right any times...I know visa's top institutional holders have been given the green light to sell as much as 30% of their stake to raise cash at the end of July. Does this play into your decision?

Jun 16 07:51 PM

[Tahoe00:]

On Jun 16 07:51 PM Tahoe00 wrote:

> Sean, you have been right many times...I know visa's top institutional
> holders have been given the green light to sell as much as 30% of
> their stake to raise cash at the end of July. Does this play into
> your decision?

Jun 16 07:59 PM

[Rainmon:]

What is this guy smokin? "Trends must be well established so that their continuation or reversal is clear" so he has a crystal ball that tells him when a trend is now ready to reverse or it will continue, good, I want one of those too! He goes on "price targets must be observable" what is this suppose to mean, price targets are just guesses anyway, none of this is empirical? I get so feed up with people trying to make the stock market into some kind of rational logical thing. Give me a break with this analytical jargon dude, the stock market is nothing but fear, greed, your level of risk tolerance and gambling, there is no logic in human emotions and thats what runs the markets as well as rumors, stock manipulators and corruption. Excuse me, I have to go throw up now...

Jun 17 03:00 AM

[User 305589:]

gl, the trade make work out well - but i certainly won't short Visa here. I would welcome a sharp drop though, for establishing a long term long position - purely fundamentally driven, of course.
That being said, there are myriads of charts looking pretty bearish right here right now. I think we will have 1-2 very interesting weeks ahead. Will all the institutional players who are supposedly so much 'underexposed' to stocks eagerly buy the dip or will the market grind lower?
My bet, btw, is that the fear of missing the train by now has become bigger than the fear of losing one's shirt, so we could see some pretty hefty upside reversal after perhaps a few more days of price declines. The key, imho will then be how the market behaves after some sort of a short-term bottom has been hit? will it be a sharp surge higher fuelled by institutional buying - or will it be a rather sluggish advance. If the latter happens, then we may have already seen the tops of this bear market rally.

Jun 17 04:28 AM

[DmytrenkoArtem:]

Hm... I am agree that VISA really have solid fundamental background. Hedge funds have a large stakes on VISA and MASTECARD. But everybody is too bullish on it. Noone want to sell VISA. That saying that everybody bought it already. Maybe its really overvalued? I am just neutral on it.

Jun 17 07:04 AM

[ScroogeMcduck:]

Sean I'm curious, through your stock analysis. How low do you expect Visa to go?

Jun 17 07:15 AM

[Sean Hannon:]

It should bounce off $60 as the first line of support and I will be looking to close my short there. If it falls through $60 on heavy volume, $52 would be my price target.


On Jun 17 07:15 AM ScroogeMcduck wrote:

> Sean I'm curious, through your stock analysis. How low do you expect
> Visa to go?

Jun 17 07:53 AM

[acedebase:]

How does the trend towards debit card business impact this analysis? How do debit cards translate to international growth (same profit margins in Brazil and China as in US)? People will always have bank accounts to draw from - even if their credit is taken away from them.

Jun 17 08:50 AM

[Fighting Yoda:]

Here is what I was talking about - the fight over fees has begun big time:
Visa, AmEx Clash With Wal-Mart, Target on $48 Billion in Fees
By Peter Eichenbaum
June 17 (Bloomberg) -- Visa Inc., American Express Co. and JPMorgan Chase & Co., already squeezed by new U.S. curbs on credit-card rates for consumers, are girding for a renewed battle over $48 billion in fees charged to merchants.

www.bloomberg.com/apps...



On Jun 16 05:57 PM Fighting Yoda wrote:

> Visa despite not being vulnerable to defaults is vulnerable to slow
> downs- the card issuance and usage is down. The issuers are also
> negotiating for lower processing charges from Visa and MA.
>
> Shorting is not what I would recommend based on technicals, but will
> definitely not go long.

Jun 17 02:31 PM

[Graham and ...:]

Short,or buy puts on Visa and Amex , the whole credit space.

(Long Amex puts).

Jun 20 11:58 AM

[Rainmon:]

I just got a great deal on a visa card with a large credit line, 0% balance transfer offer with $99, GO SHORT!

Jul 19 03:25 AM

[Rainmon:]

3% transfer fee with a $99 cap good for a year...

Jul 19 03:28 AM