Mastercard (NYSE:MA) ended last week’s rally with an epic thrust that jammed the credit card giant to a new record. Its price chart is gorgeous but is suffering from an ailment that eventually inflicts all of the biggest gainers. We’re talking, of course, about overbought conditions. Today we’re breaking down the disease and providing a trading remedy for MA stock.
I have two options strategies in mind to capitalize — one for bulls and one for bears. Which trade you take is a function of two things: timing and existing portfolio bias.
The bearish-leaning play requires immediate action. A pivot high has formed, and the pullback is already upon us. The bull trade will require some patience. We need additional down candles before a bona fide buy-the-dip setup forms.
As for portfolio bias, well, that is a variable that one should take into account before adding any new position to their portfolio. It’s always easier to take the play that reduces portfolio risk. For example, if I’m already leaning aggressively long with a handful of bullish positions, then it’s easier to take the bearish idea.
Let’s take a closer look at the price action to build the case for both sides.
Running, but Tired
The weekly trend reveals a powerful recovery from the March low. All it took was two weekly upswings interrupted by a brief rest. The latest advance signals increasing momentum and a resurgence in buying interest. Every major moving average is rising beneath the price, confirming bulls’ dominance across all time frames. Volume patterns look solid as well, with no distribution weeks since mid-June.
Short of a single doji candle, MA stock has rallied for nearly seven weeks straight. The daily view shows just how persuasive the past month’s price action has been. After July’s earnings, Mastercard shares blasted through resistance, based for two weeks, and then broke out again. We entered Monday’s session having rallied 10 of the past 11 days. The thrust carried MA far above its 20-day moving average. To signal just how extended the price became, we can overlay a Bollinger Bands indicator.
Friday’s surge drove MA above the upper band for the second day in a row. It’s very rare for the stock to remain outside the upper band for an extended period of time, so it should come as no surprise that sellers finally struck yesterday. Bears looking to bet on the pullback should have pulled the trigger on Monday. The prior record high from February near $346 is a logical first target. I’ll share my strategy of choice in a moment.
Bulls should be cheering the dip as well. MA stock was way too hot and needed a pullback to create a lower-risk entry. Whoever was chasing on Friday after such a monster run needs their head examined. If you resisted the urge to pile in, congrats. If we can get another two or three down days, an attractive bull retracement pattern will develop. That’s the time to strike. It’s impossible to know how far or long it will retreat, but the ideal scenario would be a three to five bar drop toward the $340 zone.
At that point, bull puts or bull calls are worth exploring.
A Bearish Consideration for MA Stock
If you find yourself building a neutral to bearish position in anticipation of continued consolidation or a pullback, then listen up. Implied volatility is down at the 15th percentile making put calendars an interesting proposition.
The Trade: Buy the Oct $350 put while selling the Sep $350 put for a net debit around $6.50.
The strategy profits from time decay and a slightly bearish move. If MA stock pushes down toward $350 and a few weeks pass, then you could capture a 20% return or higher. Because you acquire negative delta, adding the position will reduce the risk of a bullish-leaning portfolio.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
For a free trial to the best trading community on the planet and Tyler’s current home, click here!
