Dow component American Express Company (AXP) has rallied more than 35 points off March's three-year low in the $60s but faces major headwinds in coming quarters, raising the potential for profitable short sales. That downside could unfold before the end of the second quarter because weekly relative strength readings are probing overbought levels even though the three-month uptick has failed to dislodge highly bearish monthly readings.

Rivals Mastercard Incorporated (MA) and Visa Inc. (V) are better positioned to survive and prosper in coming years, with robust digital payment systems that have become even more attractive due to the worldwide pandemic. Meanwhile, American Express remains highly dependent on business travel, which may never return to pre-pandemic levels because many corporations are adapting quickly to the virtual meeting world.

Of course, other travel-oriented companies have taken a beating so far in 2020, with plummeting revenues and transactions translating directly into lower Amex profits. A sense of normalcy has returned to the globe in the past month, but it could still take years for the airline, lodging, and restaurant industries to recover. This could reduce the company's major sources of income in coming fiscal years while raising the odds for an eventual breakdown through the March low.

AXP Long-Term Chart (1991 – 2020)

Long-term chart showing the share price performance of American Express Company (AXP)
TradingView.com

The stock ended a four-year downtrend at a multi-year low under $5.00 in early 1991, entering an uptrend that mounted the 1987 high in 1995. Momentum traders then took control of the ticker tape, carving a powerful advance that completed a long-term top at $55.15 in the third quarter of 2000. The subsequent decline found support in the low $20s after the Sept. 11 attacks in 2001, yielding a strong bounce.

A successful 2002 retest attracted steady buying interest, underpinning impressive gains through the mid-decade bull market. The uptrend completed a round trip into the 2000 high in 2006 and broke out in a rally that failed after adding just 10 points. The subsequent downtrend accelerated through the 2001 low during the 2008 economic collapse before coming to rest at a 14-year low in the first quarter of 2009.

A bounce into the new decade finally reached the 2005 high in 2013, yielding an immediate breakout that posted upside into the third quarter of 2014, when the stock topped out once again. Subsequent selling pressure ended at a four-year low in the first quarter of 2016, while committed buying interest resumed after the presidential election. This wave carved a steady bull market advance that posted a series of new highs into January 2020's all-time high at $138.13.

The monthly stochastic oscillator has carved a complex sell pattern since hitting an extremely overbought technical reading in January 2018. The series of lower highs and lower lows still hasn't reached the oversold level, raising the odds for additional downside in coming months. Short-term price action has reached and reversed at the 20-month simple moving average (SMA) at the same time, indicating that the recovery rally may have run its course.

AXP Short-Term Chart (2017 – 2020)

Short-term chart showing the share price performance of American Express Company (AXP)
TradingView.com

A Fibonacci grid stretched across the first quarter swoon places the stock at the .50 retracement after a reversal at the .618 retracement level. The 200-day exponential moving average (EMA) cuts through this conflicted zone, highlighting its importance in trend development because the moving average was broken on heavy volume in February. Two-way action in the last week marks the first phase of a test at new resistance, with the outcome sealing the stock's fate into the third quarter.

The on-balance volume (OBV) accumulation-distribution indicator ended a strong accumulation phase in May 2019 and failed to break out with price in January 2020, establishing a bearish divergence that warned of weak institutional sponsorship. That subsequent decline ended the divergence, dropping OBV to the lowest low since September 2017. It has made little progress in the past three months despite the big bounce, also raising the odds for renewed downside.

The Bottom Line

American Express stock faces the same headwinds as other travel-oriented companies, increasing the odds for profitable short sales.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.