(Click on image above to enlarge it.)
When we last examined the chart of American Express, we saw that the Ocean sell signal in September had driven prices down to a low near 20.00. Given the severity of the crisis that has engulfed the financial sector since then, let's come forward and take a look at some of the recent price action in AXP and how the standard Ocean tools and the STX have performed.
Here on the daily chart, I've added only a few of the Ocean tools to direct attention to the sell setup and to the behavior of the STX. We see an NMC2 Zero Hit sell setup on Tuesday, Nov. 4th (shown with red arrow in NMC sub-graph), with a short entry the following day at roughly $28.60.
As the Zero Hit was forming, prices had risen to the resistance of the Regular Ocean moving average (thick solid magenta line on prices - upper standard deviation band not shown to enhance scaling appearance of chart), and to the upper standard deviation band of the Fast Ocean moving average (upper green band on prices). This is a common area where a market often meets important resistance as a Zero Hit is forming, and adds significantly to the confidence of the trade setup unfolding as expected.
Also, the NST has become overextended, rising above its upper overbought threshold (red arrow in 2nd sub-graph). This too is a common event that occurs as a high quality Zero Hit is developing.
Note that the day after the short entry, prices sliced below the STX, thus allowing it to function as a protective stop for the short trade. At this point, or soon thereafter, we would jettison our price-based initial stop and switch to the STX as the preferred stop mechanism.
There are two points of interest that unfold after the entry - the two-day pause that took place immediately afterwards (labeled point A on prices), and the quick 40% collapse of prices leading to the oversold condition within 5 days after the entry (labeled point B on prices and in the NST sub-graph). Let's first focus on the brief pause before the rapid decline (point A), and then we'll address the oversold condition at point B, and how to use that information to enhance the benefits of the STX.
One last point... To mentally prepare us for an analysis of the lows at point B on 11/12 and 11/13, notice that the entire range of those two days was below the lower standard deviation band of the Ocean Regular moving average (lower dashed magenta band), and that the NST was also below its oversold threshold (point B in bottom sub-graph). That will be important information when we discuss that area of the chart a little later.
Immediately after the entry and the violation of the STX on 11/6, prices "hovered" near the STX as the anticipated downdraft gathered energy, coming within 10 cents of a violation on 11/10, the second day of the minor consolidation (labeled point A). As we have seen with other examples, when prices come within near proximity of the STX, it's a subtle message to look to lower time frames for possible trade setups.
The dominant role of the STX is to provide us with an accurate and valuable stop location, yet it also serves as a vehicle to identify potential add-on trade locations with drastically-reduced required risk levels. Given the near hit of the STX on 11/7 and 11/10, let's come down to a lower time frame and focus on the AXP 130-min STX chart for possible opportunities.
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