Amex Beats on Earnings, but Stock Slumps Anyway

American Express Company (AXP) is a financial services giant and a component of the Dow Jones Industrial Average. The company offers credit cards, charge cards, and travelers' cheques in the United States and around the world.

Amex shares closed the first half of 2019 at $123.44 on June 28, which became a key input to my proprietary analytics. The only level left over from the first half is its annual pivot at $117.52, which was a magnet between April 28 and June 5. There's a monthly value level for July at $120.86, with a semiannual value level at $106.31 and a quarterly risky level at $134.44. The daily chart shows the stock above a "golden cross," and the weekly chart is positive but overbought.

Fundamentally, Amex has a P/E ratio of 17.01 and a dividend yield of 1.23%, according to Macrotrends. Amex reported better-then-expected second quarter results before the opening bell on Friday, July 19, and reiterated its full-year guidance. Strong U.S. growth offset slower international growth, which likely led to the share price decline.

The daily chart for American Express

American Express stock has been above a "golden cross" since March 14, when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices lie ahead. This positive led the stock to its all-time high of $129.34 set on July 16.

The horizontal lines are the second half 2019 value level at $106.31, the annual pivot at $117.52, and the value level for July at $120.86. The third quarter risky level is above the chart at $134.44. The 50-day and 200-day simple moving averages are currently $122.02 and $110.33, respectively.

The weekly chart for American Express

The weekly chart for American Express is positive but overbought, with the stock above its five-week modified moving average of $123.10. The stock is also well above its 200-week simple moving average, or "reversion to the mean," at $86.78. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 88.22 this week, well above the overbought threshold of 80.00 but shy of the threshold of 90.00 that would indicate an "inflating parabolic bubble."

Trading strategy: Buy American Express shares on weakness to the monthly and annual value levels at $120.86 and $117.53, respectively, and reduce holdings on strength to the quarterly risky level at $134.44.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on June 28. The quarterly level was also changed at the end of June.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12x3x3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.