Trade of the Day: Discover Financial Services (NYSE:DFS)

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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).

You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.

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