JUSTINE UNDERHILL: Welcome to Real Vision's Trade Ideas. Today, we're sitting down with Patrick Dunuwila of The Chart Report. Great to have you here.
PATRICK DUNUWILA: Thank you.
JUSTINE UNDERHILL: So this is your first time on Trade Ideas. Can you give us a little bit of your background and what you do?
PATRICK DUNUWILA: Sure. I'm a trader, technician, and editor-in-chief of The Chart Report. The Chart Report is a website that aggregates and curates the best technical analysis from the smartest analysts out there, and it was kind of born out of the idea that we think there's a lot of bad technical analysis out there and just overall market analysis in general.
And what we do with the chart report is we separate the bad from the good, and we find common themes that people are talking about, and we try to connect those themes, and find threads, and pull them together so that our readers have actionable ideas and have a better chance of navigating the market.
JUSTINE UNDERHILL: So with that, what sort of themes or ideas do you see going on in the markets right now?
PATRICK DUNUWILA: Sure. Well, the trade idea I brought for you today is Visa. That's ticker symbol V. And we think it's really a story of relative outperformance. And before I get into Visa I want to touch on the overall market real quick.
And one theme that we've been talking about a lot on the chart report and hearing a lot of technicians talk about is this flat 200-day moving average. And what that means, what that's indicating is that there's no clear trend in place. There's not a good way to have clear conviction, bullish or bearish, one way or the other, right now.
It's what that flat 200-day moving average is suggesting is that all we can anticipate here is choppy, sideways, messy price action. And in that sort of environment, it's all the more reason to be long the strongest quality names. And we think a large cap name like Visa presents a great opportunity right now.
The first chart I want to look at is large caps versus small caps. And we have the Dow Jones relative to the IWM, which is the small cap Russell 2000 ETF. And you can see that it's outperforming here, and we expect large cap to continue to outperform in this environment.
This is really top-down technical analysis, and so you want to be in the strongest names in the strongest areas of the market. And as far as sectors go, it might surprise some people to learn that this is actually a technology stock. It strikes a lot of people as a financial stock understandably, but it's actually the third largest component in the XLK, the tech sector SPDRs ETF, behind Apple and Microsoft.
So when you take a look at how tech has fared relative to the overall market, the S&P, we have a chart here of XLK relative to the S&P 500. You can see that relative to the S&P 500, tech is hitting all-time highs, certainly a bullish thing.
Now, tech has really been outperforming since going back to pre-financial crisis. It's been the best performing sector year-to-date. Not only that, going back 5 years, it's been the best performing sector of the S&P 500 sectors. So again, it's an area of the market that you want to be in. And we're just trying to find ways that you can swim with the trend here. And that top-down approach helps you nail down to the strongest names within the strongest sectors.
So then if you look at Visa relative to the overall tech sector, you find that it's been outperforming the tech sector. This is going back to 2011. So that's certainly another bullish thing, and we think that trend will continue. It's more likely to continue than to reverse.
JUSTINE UNDERHILL: So what levels are you looking at for Visa?
PATRICK DUNUWILA: Sure. Let's take a look at the daily candlestick chart of Visa for a more tactical approach to this trade, and we'll talk about some specific levels here. On this chart, you can see that Visa's broken out to all-time highs, and it's reached those highs that it previously had made in October of last year. And since then, that previous resistance level from the October highs is now acting as support.
And that goes along with classic technical analysis and the principle of polarity, whereas when resistance is broken to the upside, it then tends to act as a floor. It tends to act as support. And you can even see on that chart, once it broke out, it threw back. we call that a throwback. When it revisits that support level, it threw back to support, and that level has been holding pretty well. So we think that that presents a good clear level to trade against and shows you a good risk and reward opportunity. It clearly defines where your risk level is.
JUSTINE UNDERHILL: So how high do you see the stock potentially going?
PATRICK DUNUWILA: Yeah. So as we've mentioned, it's at all-time highs. It's very close. I mean, it's trading a little off them. But in uncharted territory like that, one of the tools we use is the Fibonacci extension. So we took the Fibonacci extension from the October to December 2018 decline, and that projected up to the $170 level. We took the 161.8% Fibonacci extension, and that brings you to the $170 level almost exactly. And that represents about 10% upside from current prices.
If you use 149 as a stop, we think that's the more conservative stop. But you could go all the way down to 144 with your stop. I wouldn't put it any lower than that. And as an entry, an ideal entry would be around 151.50, so $151.50. And we think that you could be buying any weakness adding on dips here.
JUSTINE UNDERHILL: And what's the time horizon on this trade?
PATRICK DUNUWILA: Sure we think it's good for the next quarter, really. Again, as long as you stick to those risk management levels, we see plenty of reason to be buying as long as it's above that, call it 150 level, that zone. We draw support and resistance with a crayon, not a pen or a pencil, because you want to have it be more of a zone than a specific hairline level, if that makes sense.
And another thing is back to what I was talking about the broader market environment right now being a little bit choppy, this trade's very prone to whipsaws, meaning you could get stopped out, and just to have price return back above your level. Very frustrating kind of environment. But we see no shame in getting back long as long as it's above that level. Those former highs from October present a clear now support level. And yeah, we think you can be buying on dips here.
JUSTINE UNDERHILL: Do you see market volatility as the potential biggest risks of this trade?
PATRICK DUNUWILA: Potentially. But we think that's all the more reason you want to be-- if you have to be long stocks, you want to be in the strongest names in the strongest areas of the market. So it's all the more reason to be in these, so we think.
JUSTINE UNDERHILL: Do you see any major risks here?
PATRICK DUNUWILA: None other than the broader market risk. And as long as you stick to your stock levels, we think it presents a good risk and reward opportunity.
JUSTINE UNDERHILL: Great. Can you summarize this Visa trade in 30 seconds?
PATRICK DUNUWILA: Yes. I would point to the specific levels. First of all, again, story of relative outperformance. The trend is up. That's the principal reason. And 149 would be your stop. Again, you can go all the way to 144. Obviously, position size accordingly. And you would use 170 as your target price. Be taking profits on the way up and be buying on dips. 151 would be an ideal entry.
JUSTINE UNDERHILL: Great. Patrick, thank you so much.
PATRICK DUNUWILA: Thank you.
JUSTINE UNDERHILL: So Patrick is bullish on technology. Specifically, he likes buying Visa, ticker symbol V, between 149 and 151.50, with a stop loss of 144 and a target of 170 over the next 3 months. Just remember that this is a trade idea and not investment advice. You should do your own research, consider your risk tolerance, and invest accordingly. For Real Vision, I'm Justine Underhill.