SPLK Stock: On the Verge
Splunk Inc (NASDAQ:SPLK) reported earnings after the close on Tuesday November 29, 2016. It beat on both the top and bottom lines, and guided the next quarter on the high end of expectations. This was a perfect trifecta of good news, and investors responded by sending SPLK stock up in after-hours trade.
When all was said and done, Splunk stock closed the after-house session up 6.90%, and was set to start trading on Wednesday at $61.34.
Prior to this earnings announcement, SPLK stock was down modestly on the year. Earnings are finally going to provide some solace for investors. It’s been quite the wild ride in 2016 because, at one point, Splunk stock was trading as low as $29.85 and was registering a hefty 49% loss for the year. Splunk stock spent the majority of the year fighting to get back to even.
There have been a number of constructive developments that are setting up on the Splunk stock chart and, if certain levels of resistance are taken out, Splunk stock can stage quite the incredible run. The question is, will the earnings announcement trifecta be the catalyst that causes the price to rocket higher?
The following Splunk stock chart illustrates the developments that have occurred year-to-date.
Chart courtesy of StockCharts.com
The SPLK stock chart illustrates that a steep sell-off ensued in early 2016, and it took the remainder of the year for the stock price to regain the level that was lost.
A death cross was already engaged when the year began, and this bearish signal created a bearish headwind. As a result, the path of least resistance was to the downside. In June, the death cross was reversed when a golden cross was generated.
To clarify the difference between the two signals, a golden cross indicates that a bull market is on the horizon, and a death cross indicates that a bear market is on the horizon. A golden cross and a death cross are generated when the faster moving average (50 day-moving average) moves above and below the slower moving average (200 day-moving average), respectively. The golden cross and death cross are exact opposites of each other.
Now that a golden cross is engaged, a bullish tailwind exists in which the path of least resistance is higher and bullish setups have a higher probability of success.
In late August, SPLK stock starting trading within a very tight range that oscillated on either side of the 50-day moving average. When a price breaks out of the trading range that has been created, a new trending move will develop. With a golden cross engaged, the odds that this pattern will resolve itself in a bullish manner have increased, and the earnings announcement may be the catalyst that finally sets Splunk stock free to soar.
Using a longer-term time frame, the Splunk stock chart illustrates the gravity of a bullish breakout.
Chart courtesy of StockCharts.com
The bullish setup that has presented itself on the longer-term chart of SPLK stock is mind-boggling.
A giant impulse wave took SPLK stock higher in 2013 and, during the next three years, a consolidation wave has been unwinding the overbought condition that had been created. The theory behind these waves is that once the overbought condition has been alleviated, the consolidation wave will complete, the price will exit this wave via a breakout, and a new impulse wave will develop. In theory, the new impulse wave should mirror the initial impulse wave.
A break above the sideways trading range highlighted in the first chart would effectively complete this consolidation wave, and this would mean that a new impulse wave would be in development. This new impulse wave would set its sights on the previous high at $106.15.
The moving average convergence/divergence (MACD) indicator has converged, and a bullish cross is set to take place. MACD is a simple and effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish signals. A bullish cross would indicate that the bulls are once again in control, and this signal would generate at the exact same time the consolidation wave is set to complete.
Such a feat would put to rest the dull and boring price action in SPLK stock that has dominated the second half of 2016.
Bottom Line on Splunk Stock
Splunk stock has the potential to complete a bullish pattern that could send the stock soaring. In order for this to occur, SPLK stock needs to close above the trading range that has contained the price since late August.