Splunk Stock Is on the Verge of a Technical Breakout

Splunk StockSPLK Stock: Aligned and Ready

I first stumbled upon Splunk Inc (NASDAQ:SPLK) stock after the company announced its third-quarter earnings report on November 29, 2016. At the time of that report, there were indications that a possible breakout was occurring, because certain indicators were on the verge of generating bullish signals.

My bullish inclination at the time of that report was a little premature, because nothing really came of it.

The SPLK stock price just continued to languish and trade sideways. The reason I am returning to this name is that the sideways trading action which followed that earnings report was not all wasted. The indicator that was converging has now swung into bullish alignment, and is now suggesting that higher Splunk stock prices are on the horizon.

To quickly clarify for anyone who hasn’t had the pleasure of indulging in any of my previous publications, I generate my views on potential investments using technical analysis. This method of investment analysis is based on the notion that historical price and volume data can be used to discern trends and forecast future prices. I have been using this method to create investment strategies for nearly two decades, and I have found great value in the information it provides.

The following Splunk stock chart illustrates the indications that are now supporting an advance.

Splunk stock chart

Chart courtesy of StockCharts.com

On a big-picture basis, the price action since Splunk shares began trading in April 2012 has been constructively bullish. Constructive bullish price action consists of a two-wave structure containing an impulse wave and a consolidation wave.

The function of an impulse wave is to advance the price of the stock, while the function of a consolidation wave is too unwind any overbought conditions that were created during the advance and to set up the next advancing impulse wave. This two-wave structure creates the necessary building blocks for a sustainable trend.

The moving average convergence/divergence (MACD) indicator located in the lower panel of the chart is used to confirm the predominant constructive wave that is in development. MACD is a simple and effective trend-following momentum indicator that uses signal-line crossings to distinguish between bullish and bearish momentum.

In February 2017, a bullish MACD cross was generated. This indicator is now suggesting that bullish momentum is propelling SPLK stock and that, as a result, the path of least resistance is now geared toward an advance. This serves to suggest that an impulse wave is now in development.

If I assume that an impulse wave is now in development, I can also assume that the previous all-time high that was set in February 2014 is going to be tested. The following Splunk stock chart illustrates the price action that is currently in development that will act to both support and confirm this bullish assumption.

IMG_0027

Chart courtesy of StockCharts.com

Since the fall of 2015, a technical price pattern has been in development. The completion of this pattern will easily suggest that higher SPLK stock prices are likely.

The technical price pattern in development is an “inverse head & shoulders” pattern. The inverse head & shoulders pattern consists of three troughs and a neckline. The middle trough, the head, is the largest, and the first and third troughs, the shoulders, are usually of equal size. The neckline, or horizontal level of resistance, is formed by connecting the reaction highs. The pattern is complete when the price closes above this level of resistance, which serves to suggest that higher stock prices are on the horizon.

This technical price pattern does not only dictate the next direction that the stock is going to take, but it is also instrumental in providing a potential price objective. This price objective is obtained by taking the depth of the head and extrapolating this value above the neckline.

Applying this method to the pattern above suggests a potential price objective of $105.00 when the pattern is finally completed. This price objective is in line with the all-time high that was set in February 2014, as the initial impulse wave was concluding.

The completion of the inverse head & shoulders pattern is being supported by the bullish MACD cross that was generated on the monthly Splunk price chart. The completion of this technical price pattern is also being supported by the uptrend line that is currently in development. This uptrend line is created by connecting the troughs on the price chart, and using this uptrend line as a tool is as simple as it was to create.

As long as the price remains above this uptrend line, I can only assume that the bullish trend that began off the February 2016 lows is set to continue. Breaking below this uptrend line would place the whole technical price pattern in jeopardy.

The current indications support the notion of higher prices but, at the current juncture, I would wait for the price to close above the horizontal level of resistance in order to confirm that an impulse wave is in development, and higher share prices will follow.

Bottom Line on Splunk Stock

Indications on the Splunk stock chart are ready and aligned to support an advance. I would wait for the price to close above a technical level of resistance in order to confirm the view that higher SPLK stock prices are likely.