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Today, we’re opening a new bullish trade on Discover Financial Services (DFS). DFS is in the unique situation of having just formed an inverted head-and-shoulders bullish continuation pattern in the middle of a larger inverted head-and-shoulders bullish reversal pattern.
If you look at the stock from mid-April — when the stock jumped higher following a stellar earnings announcement — to today, you can see the bullish continuation pattern (left shoulder = mid-May; head = late June; right shoulder = early August) actually forms the right shoulder of the bullish reversal pattern (left shoulder = late September; head = mid-February; right shoulder = late June).
DFS completed both patterns when the stock closed above $57.50 in the aftermath of the better-than-expected nonfarm payrolls announcement on Aug. 5. While the stock may move higher than this in the long term, we are looking at resistance at $60 as our initial price target for this trade.
DFS is a fundamentally strong stock. Improving jobs numbers and other positive economic data show DFS’s cardholders — who typically have slightly lower credit scores on average than those at Visa (V) or American Express (AXP) — are less likely to default on their debts in the short term. DFS’s strong dividend yield and low P/E ratio, compared to its competitors, make it an attractive bullish target.
Buy to open the DFS October 57.50 Calls (DFS161021C00057500).
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