My Kind of Setup

http://www.youtube.com/watch?v=EHRjmfeNplQ

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As fate would have it, Morgan Stanley decided to spin off its Discover credit card operations on the cusp of one of the most vicious bear markets in several generations. Despite Discover falling off a cliff as soon as it IPO’d back in July 2007, the stock has made an impressive bearish to bullish reversal in recent years. You might say the same about most issues, but Discover has impressed me with how relatively shallow its corrections have been in both 2010 and this year. While everyone, including me, seems to be talking about the Mastercard and Visa secular bull stories in the credit card space, Discover looks as enticing a long setup as any right now.

I currently have no position, but will be giving this a careful look next week. Let’s start with the monthly chart and work our way up to the present timeframe for a complete analysis below. Note that Discover reports earnings on December 15.

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Direct Vimeo Link Click Here

 

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The content below was from a post I originally published on March 3, 2011. Here is the archive. I am reposting it now to show how impressive the price action in both Visa and Mastercard have been this year, given the struggle of the overall market. MA was $261 when I wrote this post, and is currently $375. V was $75 then, and is now $96. I expect both stocks to be part of a new group of leaders, should the market breakout in the coming weeks. 

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Once known as reliable momentum names, notably Mastercard, the credit card players have recently become a much-maligned group, in the face if menacing regulatory risk out of Washington. However, a look at their charts of late is telling me to keep them on watch.

The weekly chart of Mastercard shows a textbook, multi-year symmetrical triangle near its apex. Note how all weekly moving averages are relatively compressed and are all below price, offering support. I am looking for a break and hold above $260 to validate the bullish move out of the triangle. In a similar vein, Visa’s daily chart shows price breaking out above all moving averages today, out of a descending triangle. Once again, all of those moving averages are now compressed and firmly below price, which usually portends a big move higher.

Both names can run much higher before they even come close to approaching multi-year highs.

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A big part of the frustration for many traders in this type of a market is that we see a huge gap a few times a week at the open, and then spend quite a bit of time churning for the rest of the session until the next overnight gap. Currently, the SPY retracted back to yesterday’s open, but still has to fill the gap, shown below on the 10-minute chart. Note the rejection at 11:50 AM EST from an attempt to get into gap fill area. Despite all of the thrills, flashes, and fills, we have gone essentially gone nowhere since yesterday morning’s open.

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…but then again, to borrow the expression from the guys over at ESPN, aren’t we all?

The recurring pattern of sharp sell-offs from negative news flow out of Europe, followed by a snapback rally based on rumors of positive, accommodative policies is taking shape again this morning. Headed into the weekend, perhaps the only certainty is that more uncertainty will emanate out of the European politicians’  and central bankers’ meetings. Clearly, the market is concerned about the long-term viability of the European Union, or else I suspect we would not be seeing such sensitivity to price action from the headlines. Shorter-term, though, the various rumors alternate between a quick demise of the EU, versus the can being kicked down the road, which helps to perpetuate the day-to-day swings in stocks we are seeing.

From a swing trader’s perspective, the technicals are still attempting to consolidate, at best, which makes having conviction in either direction a difficult proposition. I have been keeping a very tight leash on any positions inside 12631, still sitting in heavy cash. While the temptation may be to shut off the computer and walk away from this market, I usually find in situations like these that it is better to keep an active watchlist for potential longs and shorts. By closely monitoring the watchlist, I will see if long setups like PIR come to fruition. If they fail, then that is usually a sign that the market will continue to punish bulls, even if it does not completely break down, and vice versa for short setups and bears.

 

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