With all the US debt downgrade talk, I thought it might be interesting to analyze the stock of Moody’s Corp, MCO.
Moody’s Corporation (Moody’s) is a provider of credit ratings; credit and economic related research, data and analytical tools, risk management software and quantitative credit risk measures, credit portfolio management solutions, training and financial credentialing and certification services. Moody’s functions within two segments: Moody’s Investors Service (MIS) and Moody’s Analytics (MA). MIS is the credit rating agency that publishes credit ratings on a range of debt obligations and the entities that issue such obligations in markets worldwide, including various corporate and governmental obligations, structured finance securities and commercial paper programs. The MA segment develops a range of products and services that support the risk management activities of institutional participants in global financial markets.
Below is a 1-year chart of MCO (Moody’s Corporation). Please review the chart with all of my added notations:
Since April, MCO has been holding a very important level of support at $35 (green). Normally, one might expect MCO to bounce on that $35 level again, but instead that level broke yesterday. This break of support is probably not too terribly surprising considering that the stock seemed to be losing steam on each rally up to it’s down trending resistance (red). When a stock breaks a significant support level, traders would expect that stock to move lower, which is what I would now expect from MCO.
The Tale of the Tape: MCO had a very important support level at $35 over the past several months. Yesterday the stock broke below that $35 level, thus it should be moving lower. A short position could be entered now with a stop above $35, or a lower risk entry would be on a rally back up to $35, if that were to happen. A break back above $35 might negate the forecast for an immediate move lower.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT