Dow component American Express Company (AXP) sold off in July after the company reported bullish second quarter results but failed to raise fiscal year 2018 guidance. A quick rally followed the knee-jerk decline, lifting the financial giant to an all-time high at $104.24 in a breakout that failed in the following session. The whipsaws have left buyers dazed and confused, but long-term price action suggests a highly bullish outcome, with a sustained uptrend that could eventually reach $150.
The stock has spent seven months testing resistance at $100 while carving a massive triangle that may complete the handle of a four-year cup and handle pattern. Relative strength cycles are now turning higher, raising odds for a breakout before the end of the third quarter. The stock needs to hold above $95 for this bullish scenario to play out, with that level marking the 200-day exponential moving average (EMA). That's been no problem since April, with price action constrained in a nine-point trading range. (See also: American Express Stock Appears Set to Surge.)
AXP Long-Term Chart (1998 – 2018)
The stock ended a multi-year downtrend at $4.50 in 1991, entering a strong trend advance that continued into the October 2000 high at $55.15. It turned sharply lower through 2001, giving up more than half its value before bottoming out at $21.18 after the Sept. 11 attacks. It tested the low twice into 2003 and turned higher in a slow-motion uptrend that took three years to complete a round trip into the prior high.
A 2006 breakout made limited headway, topping out in the mid-$60s in 2007, ahead of a downturn that accelerated during the 2008 economic collapse. The stock got hit hard during that troubling period, dropping to a 14-year low in the single digits in March 2009. The subsequent bounce reached the 2007 high in April 2012, yielding a sideways pattern, followed by a 2013 breakout that posted impressive gains into the 2014 top at $96.24, just five points under Friday's closing print.
A decline into February 2016 tested support at the 2013 breakout, while the subsequent recovery wave accelerated after the presidential election. The rally reached the 2014 high in October 2017, triggering a minor breakout into $102, followed by a consolidation pattern that has taken the shape of an ascending triangle. The monthly stochastics oscillator crossed into a sell signal in January 2018 but has turned higher in the upper half of the indicator panel, signaling unusual strength. (For more, see: How American Express Makes Its Money.)
AXP Short-Term Chart (2017 – 2018)
February and April 2018 declines found support at the 200-day EMA, establishing a bullish line in the sand that has now risen to $96. The stock gapped higher after first quarter earnings in April, with the bottom of the gap at $95.50 matching the 2014 high (black line) while reinforcing moving average support. The technical tone will deteriorate rapidly if this horizontal line is broken, possibly signaling a long-term top rather than a breakout.
On-balance volume (OBV) paints a bullish picture, entering a 2016 accumulation wave that continued into the first quarter of 2018. It still hasn't reached the 2014 high, which makes sense due to the company's aggressive buybacks. However, that sword cuts both ways because the rally ended as soon as it suspended the program in January 2018. The company resumed buybacks in the third quarter, possibly adding to breakout energy in the coming weeks.
Three days of selling pressure followed the failed July 27 breakout, generating a successful test at the 50-day EMA and round number $100. Market players should now focus on the unfilled gap between $103 and $104, visible only on intraday charts, because a rally above that zone is likely to gain traction, completing the five-year cup and handle breakout with a buying surge that could reach $110 quickly. (See also: Playing the Gap.)
The Bottom Line
The bullish stars are finally aligning for American Express, raising the odds for a multi-year breakout that could lift the financial giant into Dow leadership. (For additional reading, check out: Financial Stocks Showing Relative Strength.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>