American Express (AXP) has been moving sideways for at least four months now. When it does make a move, which way will it go? Will the stock move in a bullish or bearish direction? I believe that looking at some recent moves by the company may give us a hint of where the stock will go next.
One of the things that could make American Express move up soon is the venture it is putting together with Walmart (WMT). It's an alternative to debit and checking accounts which is called Bluebird and it is a prepaid card. Paul Quintano summed up the purpose of the card when he wrote:
Bluebird has been developed for the tens of millions of Americans who are looking for advanced capabilities such as deposits by smartphone and mobile bill pay, fee transparency, and no minimum balance, monthly, annual or overdraft fees.
It will be available in 4000 Walmart stores. This is a nice income alternative for individuals who are fed up with the financial services fiasco and attempts at increased fees and regulations. There may not be a product out there for people who do not need traditional bank products but this one can work well. And it will be a great money maker for both Walmart (WMT) and AXP as the few fees involved in the card are at the hands of the consumer and the way they personally chose to use the card. There will not be any monthly fee attached to the card.
Bad Press on Defraud Charges
AXP has agreed to pay US regulatory agencies a fine of $27.5 million and refund about a quarter of a million customers about $85 million. The violations included debt collection practices, credit card solicitations, and late fee charges. The press does not sit well for financial institutions in general and I am sure just ads to the pessimism. Never the less, the financial sector has done well.
The U.S. banking industry's earnings continued to rise in the second quarter, as banks set aside less money to guard against losses. Banks boosted lending during the second quarter, after reducing loan balances in the first quarter and this is very encouraging. So even though there is some bad press in there, I think the financial sector is strong enough to help AXP move up when it does decide to break out.
Since its low point of 53 in early summer, it looks like American Express has been consolidating as it continues to trade closer together. There will come a point that the stock will have to break out. The million dollar question is which way will it break? Observing the chart, the RSI indicator is not revealing anything to me. It has remained as neutral as the stock moving between the '50' market on highs and lows. The MACD has been pretty much the same, supporting a consolidating period but not revealing any possible future direction. Both the Bollinger Band and the 50 day MA say the same as the other two indicators. At this point, if one is looking to capitalize on the consolidating period, it would have to be off a bearish bounce from the upper Bollinger Band or resistance point.
The Options Play
Since I believe the credit industry and the financial sector as a whole will remain somewhat healthy, I believe the stock will eventually break into bullish territory after it is done consolidating. The stock is presently trading at 58.82 and I am going to look at a shot term pull back before it breaks out.
- Buy the January 2013 put with a strike of '60.00' (priced at $3.25)
- Sell the January 2013 put with a strike of '57.50' (priced at $2.06)
- Net Debit to start: $1.19
- Maximum Profit: $1.31
- Maximum Risk: net debit
- Maximum length of Trade:4 months
Reasoning Behind the Trade
- I believe the financial and credit sectors as a whole is healthy.
- The new Bluebird program creates an attractive revenue stream for American Express and Walmart