LITE Stock: Exhibiting Bullish Tendencies
I scan hundreds of charts in a given day, and I look for compelling characteristics. These characteristics are like a treasure map, and I use them to generate an investment view on a potential investment. When I stumbled upon Lumentum Holdings Inc (NASDAQ:LITE) stock, I was completely enamored with my findings. The LITE stock chart is an excellent example of a bullish investment that abides to technical rules, and setting up an investment strategy around the Lumentum stock chart would not be a difficult endeavor.
Using a company’s price chart to generate an investment view is a method of investment analysis known as technical analysis. Technical analysis is based on the notion that historical price and volume data, which can be found on a company’s price chart, can be used to discern the predominant trend and forecast future stock prices. Many people are skeptical when it comes to this method of analysis, but I have seen the merits of technical analysis. As a result, I have been refining my skill in this method of analysis for nearly two decades, and have had great success by applying the generated investment view to my investment strategies.
I am bullish on Lumentum shares because they continue to exhibit bullish tendencies that serve to suggest that the path of least resistance is geared towards higher prices.
The following stock chart illustrates the important indicators that have been supporting the advance in Lumentum stock.
Chart courtesy of StockCharts.com
Since shares of LITE stock bottomed in October 2015, a bullish trend has developed. This bullish trend contains the quintessential characteristic of a bull market in which the price action consists of higher highs and higher lows. This creates the effervescent price chart that begins in the lower left and ends in the upper right. This characteristic is easily captured using a simple uptrend line that is created by connecting the troughs on the price chart. This uptrend line serves to define the bullish advance, and it can also be used as a tool.
Using the uptrend line as a tool is as easy as it was to create. As long as LITE shares are trading above this uptrend line, I can only assume that the bullish trend is intact and higher prices are likely to follow. Trading below this uptrend line would serve to suggest that the bullish advance has concluded and lower prices were set to prevail.
There is very little doubt that the uptrend line is significant, and the 200-day moving average only serves to reinforce the importance of this uptrend line. The 200-day moving average currently coincides with the uptrend line, and they have been moving in lockstep. The 200-day moving average is the dividing line between stocks trading in a bull market and stocks trading in a bear market.
When the share price is above the moving average, it is bullish. When the share price is below the moving average, it is bearish. These are the same rules that apply to the uptrend line. I can only assume that support outlined by both these metrics is quite strong.
The price action above the uptrend line has been exhibiting bullish tendencies that continue to support the notion that higher stock prices are likely.
Chart courtesy of StockCharts.com
Shorty after Lumentum stock began trading in July 2015, shares hit a peak around $27.50, and a sell-off quickly ensued. Shares didn’t bottom until October of that year, and then a rally took hold that eventually tested the $27.50 level once again in March of 2016. The second attempt to breach this level of resistance failed, and another sell-off ensued.
This price action is the textbook definition of a “cup & handle” price pattern that continues to get rejected by a ceiling of resistance until it is finally broken on the third attempt. This is exactly what transpired on July 2016, when LITE stock broke above resistance and the share price accelerated higher.
This price action that followed the completion of the cup & handle pattern has been constructive in its nature. Constructive price action consists of a two-wave structure; an impulse wave and a consolidation wave.
On the price chart above, the impulse waves are highlighted in green and the consolidation wave is highlighted in purple. An impulse wave serves to advance price, and a consolidation wave serves to unwind any overbought conditions that were created, and more importantly, set up the next advancing impulse wave. This alternating wave structure forms the building blocks necessary to create a sustainable trend.
This bullish constructive price action that is occurring above support outlined by both the uptrend line and the 200-day moving average only to serves to reinforce the view that higher Lumentum stock prices are likely.
Bottom Line on Lumentum Stock
I am bullish on Lumentum stock because the price action and technical indicators that were generated on the price chart warrant this view. I will remain bullish on LITE stock until there are indications on the price chart that suggest another view is warranted.