Flex Stock: Tightening the Stops
In my previous report on Flex Ltd (NASDAQ:FLEX) stock, I stated that I was bullish on this investment because the pattern on the price chart caught my eye. It was the size and scope of the pattern that brought me real intrigue. At that time, Flex stock was trading at $13.57, and today it sits at $14.53.
The markets have had quite a run since the world found out that the next President of United States was going to be Donald Trump. The media had us believing that a stock market crash was going to ensue. Little did we know that the market was going to crash in an upward direction. New all-time highs are gracing the headlines and consecutive days of gains have hit records. One starts to wonder: what is really driving this type of price action, and can it be sustained?
I am starting to question my bullish bias on Flextronics stock because a long-term level of resistance has been hit and a bearish pattern is starting to develop. I haven’t received a signal to abandon my bullish bias, but if the following levels of support are breached to the downside, I will have no choice but to retract my bullish bias. A break below support will suggest that a larger correction is set to ensue.
The following Flextronics stock chart illustrates the level of resistance that has been hit.
Chart courtesy of StockCharts.com
Flextronics stock bottomed in 2009, and shorty after the financial crisis concluded, Flex stock started trending higher. The bullish price action was contained by an ascending channel. There are two parallel lines that define this trend. These lines define the upper and lower bounds, which act as support and resistance. The price will oscillate between these two trend lines for as long as time permits.
Flextronics stock has been in this pattern for eight years, and this is the pattern that first caught my eye. This trend remains intact, and I have to yet to come across a single signal that will suggest that it will end anytime soon.
The moving average convergence/divergence (MACD) is a simple and effective trend-following momentum indicator. Signal line crossings are used to distinguish between bullish and bearish signals. A bullish signal was generated in July and Flextronics stock has continued to trend higher as this signal indicates that the bulls have gained momentum and that the path of least resistance is higher.
This is where the problems lay. FLEX stock has just reached the resistance that is outlined by the ascending channel. In previous instances, when this level was hit, sellers came in and rejected the price from going any higher. The price can break above this level of resistance, but the pattern that is currently in play on the short-term chart suggests that this level of resistance will hold.
The following Flextronics stock chart illustrates the bearish pattern that is developing.
Chart courtesy of StockCharts.com
The trend within the ascending channel has been supported by an uptrend line. This line is created by connecting the troughs on the price chart. As long as FLEX stock remains above this trend line, the bullish trend higher will continue.
The pattern that has just developed above the trend line has brought me some concern. The pattern in question is a bearish pattern that is known as a “megaphone top.” The name of the pattern comes from its shape, as higher highs are followed by lower lows, or in this case, similar lows. On average, these patterns act to reverse the trend.
The fact that this pattern is presenting itself just as resistance from the ascending channel is being tested is not a coincidence.
I would be on the lookout for a drop in price below the uptrend line. If FLEX stock closes below this trend, I will have all the reason to believe a selloff will ensue and would be retracting my bullish view.
Bottom Line on Flex Ltd
I am still bullish on Flextronics stock, but the price has reached a long-term level of resistance and a bearish price pattern is emerging. If the price breaks down, I will have to act accordingly and retract my bullish view on FLEX stock.