BOX Stock: Testing Support
Cloud computing has revolutionized the way companies do business, and this industry has quickly become a game changer. Many companies are venturing into this space because it offers tremendous growth potential. Microsoft Corporation (NASDAQ:MSFT) is a great example of a company that diversified its revenue streams in order to stay competitive, and cloud computing has become a a major generator of revenue growth. In my quest to find a small-cap pure play in cloud computing, I stumbled upon Box Inc (NYSE:BOX) stock. It currently sits with a market cap of $2.22 billion, which is in line with a small-cap stock and makes this company intriguing, but the factor that really got me excited about Box stock was its price chart.
As an analyst, I use technical analysis to justify holding a bullish or bearish view on a potential investment. This method of investment analysis is based on the notion that historical price and volume data can be used to discern trends and forecast future prices. As a result, my investment views are based on the indications and price patterns that are produced on a company’s stock chart. This may sound like a silly notion, but I can attest to the value this method brings and the success I have had by applying it to my investment strategies.
The following price chart illustrates when the predominant trend in Box stock changed from bearish to bullish.
Chart courtesy of StockCharts.com
Shortly after box began trading publicly, shares peaked and a bearish trend quickly developed. This consists of the quintessential characteristic of a bearish trend: lower lows followed by lower highs. This ends up creating the stereotypical bearish price chart that begins in the upper left and ends in the lower right. Not exactly a price chart to be enthusiastic about.
This bearish trend is best captured using a simple downtrend line. This downtrend line is created by connecting the peaks on the price chart. Using this downtrend line as a tool is as easy as it was to create. As long as Box shares were trading below this trend line, it was assumed that a bear market is still intact and lower prices were set to prevail. Breaking above this downtrend line would serve to suggest that the bearish trend had concluded, and a bullish trend could now commence.
In August 2016, Box stock was finally able to gather enough strength to break above this downtrend line. This feat indicated that the bearish trend had finally concluded, and was reinforced by the relative strength indicator (RSI) located in the upper panel of the chart above.
RSI is an oscillator that is used to measure overbought and oversold conditions. A measure below 30 indicates that a stock is oversold, while a measure above 70 indicates a stock is overbought. When an investment is in a bearish trend, it tends to trade below 50 and remain there. This is exactly what occurred when Box was trading below the downtrend line. When box shares finally broke above the downtrend line, this indication coincided with the RSI indicator moving above 50.
The following Box price chart illustrates the bullish trend that developed after the downtrend was broken.
Chart courtesy of StockCharts.com
Shortly after the downtrend was broken, a golden cross was generated. A golden cross is a bullish indicator that is produced when the faster 50-day moving average (highlighted in blue) crosses above the slower 200-day moving average (highlighted in red). This indicator is popular among traders because it serves to suggest that a bull market is in development. I tend to tilt my trading strategies in the direction of this indicator because it is not uncommon for the share price to accelerate in the direction suggested by this indicator.
The golden cross correctly identified that a bullish trend was in development, a trend that contained the characteristic of higher highs and higher lows. This trend is the exact opposite of the bear market that gripped Box shares shortly after Box Inc started trading publicly. This bullish trend is best defined using a simple uptrend line, and like the downtrend line, this trend line is an important tool and indicator.
Box stock is currently testing this uptrend line, and in order for the bullish trend towards higher prices to remain intact, Box shares must remain above this uptrend line. There haven’t been any indications that would suggest that the current trend towards higher prices has stalled, and the price action continues to suggest that higher stock prices are likely. As a result, I am leaning towards the bullish camp and believe that this level of support will hold. If this level does break, I can only assume that a larger correction is set to ensue.
Bottom Line on BOX Stock
I am bullish on Box stock, predicated on the notion that it remains above an important uptrend line that has defined the bullish advance that began in July of last year. All the current indications continue to support an advance, and as a result, I am leaning on the notion that the uptrend will support Box shares.