Stock: Bearish Headwinds
On November 17, salesforce.com, inc. (NYSE:CRM) reported earnings that beat both on the top and bottom lines. Investors cheered this news by sending the stock up 3.4% the next trading day.
Going into this earnings report, I was bearish on CRM stock because the pattern on the price chart suggested this view, and numerous signals had confirmed this bearish view.
Under normal conditions, a pop in price would have me retracting my bearish view, but there is something not right with how CRM stock reacted after the positive earnings report was disseminated. Yes, the price did gap up, and yes, that is a positive, but the price action that followed has been downright bearish.
This bearish price action is actually serving to reaffirm my bearish view. Throw in the fact that the market indices have made new all-time highs in recent days—but Salesforce stock has failed to follow suit—and it has me thinking that a serious sell-off in CRM stock is once again looming.
The following CRM stock chart illustrates the refined pattern that had initiated my bearish view.
Chart courtesy of StockCharts.com
In my previous report on CRM stock, I had outlined a rounded top in the chart above, but I have swapped out that pattern for a downtrend line. This downward-sloping trend line is created by connecting the peaks on the price chart, and this downward slope is what sets this trend line apart from the others. This pattern is more defined than the rounded top, and therefore more constructive.
This trend line defines the risk associated with a bearish view a great deal better than a rounded top does. If the price of Salesforce stock can break above this trend line, it would effectively negate my bearish view on CRM stock.
The price action surrounding the 200-day moving average is also serving to reaffirm my bearish view. The 200-day moving average is the dividing line between stocks trading in a bull market versus stocks trading in a bear market. When a price is above this moving average, it is bullish, and when a price is below this moving average, it is bearish.
The earnings report did get the price back above this moving average, but selling has quickly eliminated the entire price surge and Salesforce stock is once again trading below this moving average. The inability to stay above the 200-day moving average only serves to reaffirm my bearish view.
The following Salesforce stock chart illustrates the bearish price action surrounding the earnings release.
Chart courtesy of StockCharts.com
On November 18, 2016, Salesforce stock opened the trading day at $79.57 and traded to as high as $80.37 in the first few minutes, and then the selling quickly ensued. Investors used the strength generated from the earnings report to exit Salesforce stock.
The trend that has followed the earnings report has been dominated by weakness, and a descending channel quickly developed that has contained the price. CRM stock has completely filled the earnings gap, and all the enthusiasm created by it has completely been erased.
The lack of follow-through on this initial optimism could set wheels in motion that could send Saleforce stock to test the levels I outlined in my previous report on salesforce.com, inc. In that report, I outlined two levels that CRM stock could possibly test if bearish headwinds continue to persist. The first bearish price objective is $67.00, followed by $52.50.
Bottom Line on Salesforce Stock
The surge in Salesforce stock following the earnings report has failed to hold, and all the potential bullish implications surrounding this price move have been eliminated. This price action only serves to reaffirm my bearish view on CRM stock.