Tickers in this Article: MA, V, DFS, AXP
Over the past few weeks, credit card stocks have been in a free fall. While much of the recent weakness can be attributed to a recent Senate vote on a proposed measure that would allow the Federal Reserve to regulate fees on credit and debit cards, in reality these stocks were already looking weak. In addition to the recent declines, some of these stocks have broken long-term support levels and are looking very unhealthy from a technical standpoint. IN PICTURES: 7 Tools Of The Trade

Mastercard Incorporated (NYSE:MA) is one such stock. In looking at the price action in MA over the past few months, it is very apparent that a large topping pattern has been formed. The technical term for the pattern is a double top and MA confirmed this pattern when it undercut its February lows in May. The projected target of such a breakdown would take MA down toward $170 a share. Volume has been extremely high on the break, showing urgency on the part of sellers. It is important to keep an eye on the $220 level, as this should act as key resistance moving forward. If MA can somehow climb back into the base it would surely be construed as a positive development, but with the technical damage that has been inflicted, MA will likely need a lot of time before a healthy trend can emerge.

Source: StockCharts.com


VISA Incorporated (NYSE:V) is another stock that has been damaged technically on longer term charts. V was acting very well through the first quarter of 2010, actually hitting new all-time highs in March and following through for most of April. However, V started to experience some high-volume selling the last day or two in April and entered a free fall for the entire month of May. While V is oversold and probably due for a bounce, the trend has been damaged enough that a sustained move higher is doubtful without a lot of consolidation to repair that damage. A key level to watch in V will be near $80, which was a prior support level that gave way on a nasty gap down on May 14.

Source: StockCharts.com


Discover Financial Services (NYSE:DFS), interestingly enough, has not broken down like MA and V. However, it is sitting near the bottom of an established trading range and a break out of this range would put the company in a similar situation to the other two. The level for a breakdown is very clear as DFS has found support near $12.75 on a few occasions. A breakdown below this area could lead to a trip down into the $10 area, while $16.50 looks like a good level to watch on the upside. If DFS can somehow clear this level it may lead to a breakout to new highs.

Source: StockCharts.com


American Express Company (NYSE:AXP) is another credit card stock that hasn't quite broken down, but is sitting near an important support level. AXP has shown more strength than even DFS; it has held above its 200-day moving average and has approached, but not tested, its February lows. The February low near $36.50 is the area to watch for a breakdown as this would be the first lower low on the weekly chart in several months. Volume has also been higher on the recent weakness, which is a negative.

Source: StockCharts.com


Bottom Line
The one thing that stands out to me in most of these charts is that even if these stocks don't continue to free fall, enough damage has been done to them that recovery is a long time coming. Stocks need a healthy consolidation to repair the damage inflicted from these high volume sell offs. When a stock tops out and enters a correction, it traps a lot of longs who were late to the party. These longs are usually eager to sell on any bounce, making it difficult for the stock to make any appreciable advance. It takes time to flush out the weak hands and let stronger hands accumulate enough shares and suck up excess supply. That is the basic function of a consolidation and the reason it is required for a sustained advance. It appears to me that these credit card stocks need much more consolidation to flush out these weak hands. The two scenarios that could unfold is a bottom in DFS and AXP that can motivate V and MA to follow them higher, or a more prolonged correction that would likely drag AXP and DFS down with V and MA.

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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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