Is This Favorite Financial Stock Overheated?

Friday, April 25, 2014 - 9:30am

by Michael Kahn

We all naturally gravitate toward stocks that can make us money by moving higher in price. However, there are always stocks available to make us money when they move lower, and right now credit card purveyor Visa (NYSE: V) is one of them.

Visa, as well as its peers, had a rough go of it in March, losing more than 15% from its March high to its low on April 11. (Even Discover (NYSE: DFS), which my colleague David Sterman profiled last week, wasn't immune.) On the way down, Visa sliced through chart support at roughly $212 and left its 50-day moving average in the rearview mirror. It also moved below its 200-day average before rebounding with the broader market.  

Financials as a sector continue to lag, so V is fighting an uphill battle that it is likely to lose. It is currently trading just below its former support level, which is now acting as resistance.

Normally, we'd have to give the bulls the benefit of the doubt here because the stock did not fall soon after reaching this plateau. The reason we can't is that volume during the rebound rally declined each and every day. This is the hallmark of a corrective bounce rather than a bullish turnaround, and it suggests there was not an increase in demand at recent "sale" prices.

There is a sentiment condition that is also working against Visa. Stocktwits, the social media site for stock traders, reports a 91% bullish reading by its users. When sentiment on any stock or market gets that lopsided, we have to be concerned that everyone who wanted to get into V has already done so. That leaves little demand to push prices higher and flashes a warning sign.

There is also a long-term condition working against the stock. We can argue that the January and March peaks formed a double-top pattern that was confirmed with last month's breakdown. Making it worse, the decline broke a three-year rising trendline to the downside. 

If the market stays strong, then Visa could be pulled higher to negate all of these breakdowns. But with a lagging sector and serious technical damage on its own chart, that seems like a long shot.

Action to Take -->
-- Sell V at the market price
-- Set stop-loss at $220
-- Set initial price target at $185 for a potential 12% gain in eight weeks 

This article was originally published at 
Much-Loved Stock's Chart Flashing Multiple Warning Signs

P.S. I just finished reading a special report by my colleague, Amber Hestla-Barnhart, about how investors can consistently and reliably pull income from the options market. And you don't have to be a sophisticated trader to do it. Go here to learn more.

Michael Kahn does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.