Shares of American Express Company (NYSE:AXP) rallied nearly 6% on Thursday, April 20, after the company reported better-than-expected earnings.
As a result of Thursday’s pop, AXP stock looks ready to continue its rally from last October after a pause for the past month-and-a-half.
While this is down from $1.4 billion, or $1.45 per share, in the year-ago period, it was still more than enough to beat analyst expectations of $1.28 per share.
Plenty of analysts remain cautious on the stock in part due to the company’s end of the relationship with wholesale retailer Costco Wholesale Corporation (NASDAQ:COST), which converted to Visa Inc (NYSE:V).
As such, through the lens of price action, Thursday’s post-earnings rally might have just caught the stock market by surprise and could force investors back into the stock.
AXP Stock Charts
Looking at the multiyear weekly chart, we see that American Express rose sharply from the depths in 2009 to its 2014 highs. From there, AXP endured a painful year-and-a-half or so, as shares lost about 45% by early 2016.
However, at the time, this area around the $50 mark coincided with horizontal support as well as a clean 50% retracement of the entire rally from 2009 to 2014. Additionally, the round $50 number may have had at least some psychological influence as support.
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The red line on the weekly chart is the 200-week simple moving average. Note that after AmEx broke this line in October 2015, it had not been recaptured until this past January. Although the stock closed back below the line last week, as a result of yesterday’s rally, AXP stock is now right back above it.
While the bigger-picture view is interesting and crucial for perspective, the real meat of this trade idea stems from the daily chart.
Note that after exhausting its multimonth rally in early March, AXP started to pull back over the past few weeks.
This pullback took the shape of what I would describe as a bull flag pattern and measured just about 8%. Note that over the past few days leading up to the earnings report, American Express marginally broke below the 100-day moving average (blue), but this was quickly negated by Thursday’s up-gap and rally day. The stock gapped higher by about 2.5%, which fueled on itself and led the stock to close the day up 5.92%.
I can’t overstate the significance of such a post-earnings up-gap. In my eyes, this puts the trajectory of the stock back to the upside.
I legged into a quasi-long position in AXP stock on Thursday by selling out-of-the-money put spreads using June options. American Express may be near-term overbought and in need of a little consolidation following Thursday’s exhilarating rally. However, barring any major bearish reversal, the low to mid-$80s should serve as a good near- to intermediate-term next upside target.
– Serge Berger
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Source: Investor Place