In December of last year, Visa shares made an all-time high, but they were under internal technical stress. The relative strength index had dropped below its 21-period average, and moving average convergence/divergence was in bearish divergence to the stock price. A month earlier, the accumulation/distribution line had fallen below its signal average, and Chaikin money flow moved into negative territory. Momentum was declining as the stock price was advancing, and money flow indicated it was under distribution. Over the next two months, the stock fell 17% from its highs.
But the pullback process formed an inverse head and shoulders reversal pattern on the daily chart, with neckline resistance in the $74.50 area. As the pattern was forming on the chart, the technicals were turning positive, with the relative strength index moving back above its 21-period average and moving average convergence/divergence in slight bullish divergence to price. Accumulation/distribution repositioned above its signal average, and Chaikin money flow moved back into positive territory. The stock price has recaptured its 50-day moving average and moved through a downtrend line drawn off recent highs, and it is situated just under neckline resistance. A confirmed break above the neckline projects to new highs.
The MasterCard chart tells much the same story as the Visa chart, with the stock making new highs at the end of last year, followed by a pullback that was signaled by price and money flow momentum indications.
On this chart, a cup and handle consolidation pattern stabilized the stock price and helped it to regain its footing. Daily moving average convergence/divergence is overlaid on a weekly histogram of the oscillator and is moving above its centerline on both timeframes. The aroon indicator, designed to identify shifts in trend, has made a positive green-over-red crossover, and Chaikin money flow is above its signal average and tracking higher in positive territory. Rim line resistance has been broken, and the pattern projects a move back up to the former highs.
Both charts have strong technical setups, but which is the better play: to jump on board MasterCard now, since it has broken out of its bullish basing pattern, or to wait for Visa to make to complete a breakout?
I think the latter is the right strategy. At this point, a pullback in Visa shares does not constitute a failed breakout, but a similar move on the MasterCard chart would be more technically damaging. Conversely, a Visa breakout confirms strength in the sector and emboldens buyers in the space, and the stock is likely to see a catch-up momentum move that outperforms MasterCard shares.
Visa is also a holding in Jim Cramer's Action Alerts PLUS charitable trust portfolio. The stock is the portfolio's newest position. Cramer and Jack Mohr recently wrote that they love it "for the secular growth story and the company-specific catalysts this year."
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.