How to Trade the Visa and MasterCard Bearish Reversal Patterns

The recent price action on the daily charts of Visa (V) and MasterCard (MA)  has formed individual patterns that suggest the stocks may have made intermediate-term tops, and are preparing for a tradeable pullback off their October highs.

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Shares of Visa, a holding in TheStreet's Jim Cramer's Action Alerts PLUS portfolio, have been consolidating in a horizontal channel for the last two months, but broke below channel support in Tuesday's session. The width of the channel is approximately 25% of the rally off the July low as measured by the quadrant line tool, and it projects a downside target for the stock that would take it to the 50% level of the July and September range.

During this consolidation phase, daily moving average convergence/divergence, which is overlaid on a weekly histogram of the indicator, and the stochastic oscillator have been declining in bearish divergence to the flat stock price. These readings represent waning momentum and early trend decay on multiple time frames.

The accumulation/distribution line crossed below its 21 period signal average, and Chaikin money flow, which uses the A/D line as a baseline, has crossed into negative territory, suggesting the stock is under distribution. Visa closed near its low of the day and it appears that it has a rendezvous with the 50% quadrant level and/or the rising 200 day moving average. It is a short candidate at its current level using a close trailing protective buy-to-cover stop.

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A three-period bearish reversal pattern has formed on the MasterCard chart and it suggests that a significant top may have been made in the stock.

The evening star pattern is composed of a large bullish white candle, followed by a narrow opening and closing range "doji" candle, and completed by a large bearish dark candle. It represents a transition from bullishness to a neutral stance, to bearishness and a complete turnaround in trader sentiment.

The first quadrant retracement, also the October high, and the uptrend line drawn off the lows since August form a triangle which is the first area of support for the stock. Moving average convergence/divergence is flat but the relative strength index is dropping out of an oversold condition and has moved below its 21 period average. Accumulation/distribution moved under its signal line and Chaikin money flow has been tracking lower for the last month even as the stock was making new highs.

MasterCard could see a bounce off the reinforced support zone, but aggressive traders could sell into that strength, using the "doji" high as an initial buy-to-cover stop loss level.

This article is commentary by an independent contributor. At the time of publication, the author has a short position in Visa.

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