American Express Company (AXP) is a financial services giant and a component of the Dow Jones Industrial Average. The company offers credit cards, charge cards, and travelers' cheques in the United States and around the world. American Express reported an earnings beat on Oct. 16 and then ended last week with a "key reversal" day on Oct. 18. A negative daily "key reversal" occurs when a stock sets a trend high and then closes below the prior day's low. The close of $116.76 was also below the stock's annual pivot at $117.52.

American Express stock closed last week at $116.76, up 22.5% year to date and in bull market territory at 31.1% above its Dec. 26 low of $89.05. The stock is 9.7% below its all-time intraday high of $129.34 set on July 19.

Fundamentally, American Express has a P/E ratio of 15.47 and a dividend yield of 1.44%, according to Macrotrends. When American Express reported better-then-expected second quarter results on July 19 and reiterated its full-year guidance, the stock began to trend lower on July 21, so history is repeating following its Oct. 16 earnings. American Express reported that consumers spent more on their credit cards in the third quarter and added customers despite increased annual fees.

The daily chart for American Express

Daily chart showing the share price performance of American Express Company (AXP)
Refinitiv XENITH

American Express stock began is 2019 bull run with a positive "key reversal" on Dec. 26. The cycle low was $89.05 that day, with a close of $93.34, which was above the Dec. 24 high of $91.44.

The 2018 close of $95.32 was an important input to my proprietary analytics, and the stock's annual pivot for all of 2019 is $117.52. This was first tested on April 16 and was a magnet between April 16 and June 5, and then again between Aug. 13 and Oct. 18. The mid-year close of $123.44 was another input to my analytics, and the stock's semiannual value level is $106.31. The close of $118.28 on Sep. 30 was an additional input to my analytics, and the fourth quarter risky level for American Express stock is $123.25.

The weekly chart for American Express

Weekly chart showing the share price performance of American Express Company (AXP)
Refinitiv XENITH

The weekly chart for American Express ended last week neutral, with the stock below its five-week modified moving average of $118.14. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $89.79. The 12 x3 x 3 weekly slow stochastic reading ended last week at 24.31, up slightly from 22.65 on Oct. 11. During the week of May 17, before the July 16 high, this reading was at 92.06, above the 90.00 threshold as an "inflating parabolic bubble," which was a warning to sell on strength.

Trading strategy: Buy American Express shares on weakness to the semiannual value level at $106.31 and reduce holdings on strength to the quarterly risky level at $123.25, as $117.52 remains the annual pivot.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels. The semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sept. 30 established the level for the fourth quarter. The close on Sept. 30 also established the monthly level for October, as monthly levels change at the end of each month.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.