Paypal Holdings Inc: PYPL Stock Is Tarnished But Not Broken

PayPal stockPYPL Stock: Hanging on Hope

In October, I published a report outlining why I was bullish on PayPal Holdings Inc (NASDAQ:PYPL) stock. I had reason to believe that PayPal stock was on the verge of creating an unprecedented bullish run that would take PYPL stock to new heights.

The catalysts that founded my views were based on a bullish price pattern and a positive earnings report. PayPal had reported earnings that beat analyst expectations, and investors were so enthused with this report that the stock price surged the following day. This surge in price completed a bullish pattern that was in development for many months.

I thought that the wheels were in motion on this locomotive train and that new highs were almost a certainty. Funny how life works sometimes. Whenever I feel so certain about an outcome, the complete opposite event has a habit of occurring; examples include Brexit and Donald Trump, just to name a few.

My bullish view is in jeopardy, as the price of PayPal stock has failed to follow through, and the highs set on the day after the earnings report was released mark the all-time high. PYPL stock has proceeded to sell off, and and the bullish pattern I outlined in my previous report has failed. This places my bullish bias in a precarious situation, but not all is lost; there is still some hope left that a bullish outcome can still develop.

The following Paypal stock chart illustrates the pattern that suggested my bullish view and the price action that followed.

paypl

Chart courtesy of StockCharts.com

Since its inception, PYPL stock has been putting in a bullish pattern known as a cup and handle pattern. A cup and handle pattern, like many other technical patterns, describes the shape of the pattern. The shape is produced as the price gets rejected by a resistance level, and a large trough develops.

When the price finally returns to test that level of resistance again, the cup is created. The second time the price gets rejected by resistance and a smaller reaction occurs, the handle is created. This bullish pattern is completed when the price is finally able to break above the resistance level that rejected the price on the two previous occasions.

In October, a bullish breakout was set to move forward, but the price has failed to follow through. Not only has the price failed to follow through; PayPal stock has fallen below the resistance level that signaled that the bullish pattern was complete.

Occasionally, patterns fail. At this moment, the bullish cup and handle pattern has failed. Failed patterns are not to be ignored, as they are more powerful than patterns that succeed. The basis surrounding this premise is simple; traders use patterns to initiate trades. When a pattern fails, these trades must scramble to unwind the trade as quickly as possible. As a result, when patterns fail, the price moves in a swift and violent fashion.

All the bullish optimism that I had for PayPal stock has crumbled into a pile of hope. When it comes to investing, when all you have is hope, then you really have nothing at all. But this instance is going to be the exception to the rule, because hope comes in the form of a trend line.

The following PayPal stock chart illustrates a trend line that suggests that a bullish trend is still intact.

paypl2

Chart courtesy of StockCharts.com

After a brief sell-off that began in 2016, PYPL stock has been trading with a bullish bias and, as a result, a bullish trend has developed. This bullish trend is highlighted on the chart above as an uptrend line, and it is created by connecting the troughs on the price chart.

The trend line now defines the bullish trend in PYPL stock. If PayPal stock falls below this trend line, all hope for a bull market will be lost. I would reverse my tarnished bullish view and would be on lookout for bearish price patterns.

Bottom Line on PYPL Stock

The failed cup and handle pattern is reason enough to stand aside from my bullish view, but there is still a chance that the trend toward higher prices can continue in PYPL stock. This possibility is based on the uptrend line that has developed, and my bullish view on PayPal stock resides in the hands of this trend line.