Paypal Holdings Inc: PYPL Stock is Putting a Breakout to the Test

PayPal stockPYPL Stock: Backtest

Paypal Holdings Inc (NASDAQ:PYPL) stock is now in play, and news surrounding the earnings numbers were the exact catalyst to set the wheels in motion.

PYPL stock reported earnings that were in line with expectations, but it did break the top line, as revenue beat consensus estimates by 18%. The revenue number was boosted by growth in new customers and transaction volume. This news sent Paypal stock to a new all-time high, and this feat has tremendous bullish implications.

I have been watching PYPL stock for some time because the pattern that was evolving on the price chart was compelling and constructive. I use technical analysis as the basis of my investment analysis, and it is heavily reliant on price and volume data. This style of analysis uses this data to discern trends and forecast future price performance. It is under this style of analysis that I can effectively use the PYPL stock chart to set up a systematic trading strategy.

Paypal stock completed a large bullish pattern that was confirmed when shares surged higher after the earnings announcement. It is the completion of this pattern that has me so enamored with this name. The completion of this pattern also coincides with a new all-time high, and these two circumstances can send shares exponentially higher.

The following Paypal stock chart illustrates the pattern that has just completed and has given rise to my bullish view.

pypll

Chart courtesy of StockCharts.com

PYPL stock spent 14 months putting in a bullish technical pattern known as a cup-and-handle. Like most technical patterns, the name describes the shape, and this one is a bullish pattern. The cup is where most of the time the stock has spent trading, and this pricing action represents a longer-term-based bottom, where the price gets rejected as the previous high is tested. The second reaction produces a higher low, and a handle is created. A horizontal line is used to represent resistance, which is created by connecting the previous two peaks. The pattern is confirmed when the price closes above this horizontal level of resistance.

This pattern is useful in many respects; aside from just indicating the direction of the price, it also gives traders a potential price objective. This target price is computed by measuring the head, from peak to trough, and by extrapolating that number above the horizontal level of resistance. Using this methodology on the PYPL stock chart above, I have come up with a price target of $52.00.

The breakout coincided with the new all-time high. New all-time highs act like vacuums because there is no overhead resistance that will restrict the price from climbing higher. Price trends have a tendency to last longer than most thought possible, and reach levels that fundamentals cannot warrant. This price breakout can cause shares to overshoot on the upside, as greed and short-covering fuel this move.

My bullish premise on Paypal stock is heavily reliant on the fact that the recent breakout above the completed cup-and-handle pattern remains above the horizontal line that confirmed it.

It is not uncommon for the price to revert back to a level of resistance and test it from above in order to confirm that this level has been breached and to affirm that this new level is now support. Traders refer to this as a backtest, and PayPal stock is currently testing the level that confirmed the bullish breakout.

The accumulation distribution line, in the lower panel, is an indicator that uses volume to compute buying and selling pressure. Traders refer to this as money flow. It is produced by cumulatively adding volume on up days and subtracting volume on down days. The cumulative volume that is added each day is in relation to where the stock closed compared to the high and low of the day. This data is then plotted on a chart. This indicator confirms the breakout, as it has made a new high along with the price.

The Bottom Line on Paypal Stock

I am bullish on Paypal stock, as the price action supports this view. PYPL stock is currently backtesting the level that suggested a breakout, and it is imperative that this level holds, or else it will put my bullish view in jeopardy.