Could Investors Have Avoided the Capital One Meltdown?

Recent reporting has indicated that the credit market turmoil continues. The latest casualty of this crisis can be found over at Capital One headquarters where the credit card issuer warned off ’07 profits that will more likely than not miss analyst expectations.

The company is struggling with delinquencies and additions to its legal reserves and their stock price is reflecting such pressures. I’m not here to tell you that their $1.3 billion in charge-offs will usher in a bottom, because in reality, this kind of news only keeps the negative momentum from slowing down.

Instead, could investors have avoided these losses by paying attention to deteriorating technicals? Absolutely.

In the five-year monthly chart of Capital One (COF:NYSE) below, I have targeted specific buy and sell points using the Oakes Momentum System.

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At the beginning of ’03, the economy was on the rise, and the bulls helped to push the stock from around $30 to around $90 by the beginning of ’06. Slowly, but surely, the technical situation eroded. Let’s see why:

On the left-hand side of this graph, you’ll notice two buying points targeted through the use of green dots. Both the MACD and DMI momentum indicators signaled investors to buy in.

By early 2005, one of these indicators, the MACD, began to drift into negative territory when the blue line crossed below the red one. The stock continued to hold ground until its DMI counterpart finally gave in six months later. This offered investors a window of opportunity to cash out and take their gains to the bank. Anyone holding on, in hopes of a recovery, were doomed.

As you can see, the indicators are slowly bottoming out, but still have a long ways to go before another buy signal will be given. In the meantime, stay away from this particular equity if you are considering a bullish position. The downtrend should remain in tact during the ’08 year. Look for prices to test $30 over this time frame.

Good investing,

Stephen Oakes
Editor, Black Sheep Trader & Volume Spike Alert