American Express will be struggling for a while

American Express (AXP) is a famous credit card brand in the world with its unique business model. In contrast to the other cards such as Visa or MasterCard which work to maximize transaction volume,  Amex employs a so-called “spend-centric” model by maximizing the purchase volume on its cards. In other words, the card members will get more reward if they spend more money with the card, which creates a virtuous cycle and royalty.  In decades Amex has been very successful and it is so successful with long lasting competitive advantage, AXP is one of the four biggest holdings in Buffett’s portfolio. So should you buy AXP now? I don’t think so!

As much as I like AXP as a business, it is technically struggling and presents a rather bearish pattern. It has broken down its short-term support line as well as its long term bullish trend line. It is also showing a bearish head and shoulders pattern. This technical setup also coincide with its recent setback that one of its major business partner, Costco, has ended their long time co-branded agreement with Amex. For those like me who use Amex as the credit card and store membership will not be able to continue with it starting in March 2016.   All in all, AXP will be going down almost for sure. How low will it go? I don’t know for sure but I think it may likely not be something minor. There is a good chance that it will test its strong support line around $65. If that happens, we are talking about a 15-20% correction. So as investors or traders, what should we do with AXP? Here are a few advices:

·         If you have already bought AXP for long-term, no need to worry about it as it is still a very sound business and will continue for decades. Just keep it and reinvest its dividends as usual. If you know how to do covered calls, this is a good time to think about it. A deep in the money covered call may help alleviate the pain from the short-term correction of AXP.

·         If you want to buy AXP now, I strongly advise that you hold up and wait for a while. I’m pretty sure you will be able to buy it at a much better price later.

·         For traders, you may even consider to short AXP for short-term income. Right now, its trend is going down and shorting AXP at any bouncing should be a low risk trade.

 

Ultimately I will take advantage to buy AXP at much lower prices for long term when there a good technical setup with uptrend restarted. It certainly will and it is just when, not if.