Commscope Stock Returns to Test an Important Price Point

COMM stock chartCOMM Stock: Testing Support

I am returning to shed some light on Commscope Holding Company Inc (NASDAQ:COMM) stock because a lot has transpired since November 9, when my last opinion piece on COMM stock was published. In that publication, I outlined key developments that were suggesting why Commscope stock was set to surge. This event did indeed transpire as COMM shares appreciated to the tune of 30% over the next six months.

I am focusing on this name once again because on May 3, this company reported earnings that were slightly below consensus, and management compounded this bearish news by slashing forward guidance. This disappointing news caused CommScope shares to plummet by 15.26% the following day. COMM shares have since found stable footing, and it is where the shares found price support that has really piqued my interest. I have reason to believe, using the indications on the CommScope price chart, that this sell-off was just a hiccup within a longer-term bullish tend.

In my November 9 publication, I outlined that a technical price pattern known as a “cup and handle” pattern was in development. I outlined that once this pattern—which was in development for 16 months—was completed, it would open the door to much higher prices. In order to complete the pattern, COMM shares needed to close above the level of resistance that contained price during the development of this price pattern.

The following CommScope stock chart illustrates the reasons why I believe COMM shares are still trading with a bullish bias.

CommScope stock chart

Chart Courtesy of StockCharts.com

The day after my report was published, CommScope shares broke above resistance and a rally quickly ensued. Six months later, COMM shares hit a high of $42.75, representing an impressive 30% return over that time frame.

The sell-off that crushed shares following the earnings report has come back to test this level of resistance from above. This price action is known as a backtest and it is highlighted on the chart above. When a level of resistance that has contained price for a significant amount of time is finally broken, it becomes a new level of price support. The fact that COMM stock returned to test the level from above is not an uncommon event; some traders refer to this price action as “one last kiss goodbye” before the predominant trend towards higher prices reasserts itself.

This backtest illustrates that even though CommScope shares fell by an exorbitant amount, this drop in price did very little to change the bullish picture suggested by the cup and handle price pattern.

The following CommScope stock chart illustrates another metric that is suggesting that the predominant trend is still siding with the bullish camp.

COMM price chart

Chart courtesy of StockCharts.com

This chart is clearly focusing on the 200-day moving average. This moving average is used as a dividing line to separate investments that are trading in a bull market versus those trading in a bear market. When the stock price is above this moving average, it is assumed that a bullish trend has commenced, while trading below it assumes that a bearish trend has commenced.

In April 2016, COMM stock broke above this moving average, and it has not traded below the moving average since that fateful day. As a standalone indicator, it has performed extremely well. Aside from distinguishing whether an investment is in a bull market or a bear market, this moving average is also known to act as a significant level of price support and price resistance. Prior to breaking above this moving average, it acted as a level of resistance that served to contain price, and now that the shares are trading above it, this moving average is acting as a level of price support.

The sell-off on May 4 found its footing at the 200-day moving average by managing to close above it by the end of the trading day.

CommScope stock is currently trading above a major level of price support and the 200-day moving average. These metrics serve to suggest that the predominant trend is still tilted towards higher prices.

The moving average convergence/divergence (MACD) indicator located in the lower panel is converging, and a bullish signal could be generated in the coming days. MACD is a trend-following indicator that is used to distinguish between bullish and bearish momentum. A bullish cross would indicate that bullish momentum is once again governing the direction COMM shares are trading in. This creates a trading environment where the share price has a tendency to appreciate because the path of least resistance is geared towards a higher stock price.

A bullish indication, such as the MACD, which is generated after two important levels of price support are successful tested, suggests that a potential rally is set to ensue.

Bottom Line on Commscope stock

CommScope stock has returned to test two important levels of price support, and as long as the stock price remains above these levels, I can only assume that the bull market is still intact. This serves to suggest that the weakness experienced in COMM stock is just a hiccup within a longer-term bullish move.