ON Stock: Breakout
The equity markets are forging higher and created new highs on a daily basis, red hot sectors like the semiconductors industry continue to give investors the performance they seek is such an environment. I am focusing on ON Semiconductor Corp (NASDAQ:ON) stock for numerous reasons.
The most obvious is the sector it resides in, followed by tremendous growth that this company offers as they continue to perform with their largest segment: automotive. This segment now includes strides into the up-and-coming autonomous drive sector, which opens the door to a tremendous amount of growth. These fundamental factors are enticing, but it’s the technical aspect of the ON stock chart that first drew me to this stock in the first place.
I have been using price charts as the basis of my investment decisions for nearly two decades. This style of analysis is known as technical analysis, and it is based on the notion that historical price and volume data can be used to discern trends and forecast future prices. This method reaps its benefits in its ability to manage risk and provide timely indications
The following ON Semiconductor stock price chart illustrates the price pattern that first piqued my interest, and now suggests that a bullish view is warranted.
Chart courtesy of StockCharts.com
When I first came across ON stock in late September, I was intrigued by the large ascending triangle that was developing on the price chart.
Triangles are very powerful price patterns. These patterns contain two converging trend lines; one trend line represents horizontal resistance and the other trend line represents an upward-sloping level of support. These patterns generate their power by storing momentum as the pattern progresses. This is a result of the price being confined into a small space. This stored momentum is then released when the price exits the pattern.
The size and scope of the pattern above adds to the weight that is placed on the significance of this pattern. This triangle pattern has been in development for nearly 1.5 decades, and a very large reaction is expected as a result.
In late 2016, the moving average convergence/divergence (MACD) indicator in the lower panel of the above chart crossed in a bullish manner. MACD is simple, yet effective, trend-following momentum indicator that uses signal-line crosses to distinguish between bullish and bearish momentum. The bullish cross indicated that bullish momentum was once again propelling ON Semiconductor share prices and, as a result, the path of least resistance was geared toward higher prices. This indicator suggested that the price was on the verge of exiting the triangle in an upward direction.
The breakout that is highlighted on the price chart above is a result of the price exiting the ascending triangle in upward direction. This action now suggests that higher stock prices are set to prevail. The ascending channel can be used to set a preliminary price objective, and this is done by taking the depth of the largest portion of the triangle and extrapolating it above the horizontal level of resistance. When I applied this method to the chart above, it produced a preliminary price objective of $25.00, which represents a 64% return from current levels.
The following ON Semiconductor stock chart illustrates the price action that defined the breakout.
Chart courtesy of StockCharts.com
The ON stock chart above illustrates that the advance in price has been characterized by constructive price action. Constructive price action consists of impulse waves that serve to that advance the price, and consolidation waves that serve to unwind overbought conditions and set up the next impulse wave. These alternating waves that make up the constructive price action allow a trend to become sustainable.
The constructive price action has been reinforced by a golden cross that was generated in August 2016. A golden cross is a bullish signal that is produced when a faster 50-day moving average (highlighted in blue in the above chart) crosses above a slower 200-day moving average (highlighted in red).
Traders use this signal to confirm that a bull market is in development. I have found it wise to trade in the direction of this indicator because it is not uncommon for price to accelerate in the direction suggested by the indicator shortly after it is generated.
The price action on the chart above has a certain characteristic, and it has been highlighted as a “backtest.” Each and every time a consolidation pattern has been broken to the upside, the price has returned to test this level from above. This price action serves to suggest that the breakout above resistance was legitimate, and that resistance is now a new level of price support.
If this price action is set to persist, it could suggest that the price will return to test horizontal resistance outline by the ascending triangle. This level currently sits at $13.25, and I would be watching this level on numerous fronts.
Bottom Line for ON Semiconductor Stock
I am bullish regarding ON Semiconductor stock because the completed pattern on the ON stock chart suggests that higher prices are likely. My view will remain embedded until the indications on the price stock chart suggest that another view is warranted.