Square Inc: SQ Stock Chart Spells Doom for the Bears

SQ StockSQ Stock: Beautifully Bullish

I am bullish on Square Inc (NYSE:SQ) stock, and it’s not because the company’s product can turn my smartphone into a payment-processing point-of-sale unit, or the fact that this company continues to grow revenues quarter-over-quarter.

Do not get me wrong, I am quite enamored with Square Inc’s product, and the company’s ability to grow is a major sticking point. All of these factors support a bullish argument, but they have little to do with how I decide which investments suit my objectives.

I use the price chart as my primary tool to set investment strategies. This process has done wonders in removing potential emotional biases that may develop over time in owning or tracking certain companies. The SQ stock chart is what originally drew me to this name.

The following chart illustrates the pattern that first piqued my interest in Square stock.


Chart courtesy of StockCharts.com

The Square stock chart above contains three bullish patterns, and all are embedded within one another.

The first pattern is an island reversal (highlighted in pink). This pattern consists of two gaps, an exhaustion gap (gap down) and a breakaway gap (gap up) that occur at the same price level (highlighted by the pink horizontal line).

The island is created as the price action in between the gaps is isolated. In a bullish reversal formation, the pattern is significant because all the short sellers who initiated positions after the initial gap down are trapped, or—as the pattern suggests—trapped and isolated on an island.

These short positions in SQ stock need to be covered at some point. Losses amounting from shorting a stock are unlimited, as there is no limit to how high SQ stock can trade. Short covering creates a bullish tailwind, and fuels the rise in the share price.

The second pattern is a mini head-and-shoulders pattern (highlighted in green). This pattern consists of three troughs and a neckline. The middle trough, the head, is the largest; the first and third troughs, the shoulders, are usually of equal size. The neck line is formed by connecting the reaction highs. The pattern was confirmed when Square stock closed above the neckline.

The third pattern is a rounded bottom (highlighted in blue). Like many of the patterns highlighted above, the name effectively describes the shape of the pattern. This pattern is also known by another name, the saucer bottom. This pattern is a trend reversal pattern in which bearish price action transforms into bullish price action. This pattern is symmetrical, because the amount of time trending lower approximately equals the amount of time trending higher. The pattern was complete when SQ stock closed above the highest price point within the pattern.

These three patterns are all bullish, and a bullish bias is the only possible bias I can conclude by analyzing the Square stock chart.

The following SQ stock chart illustrates the price action that developed after the three bullish trend reversal patterns were confirmed.


Chart courtesy of StockCharts.com

The price action on the Square stock chart above can only be defined as bullish. Bullish price action contains impulse waves that are followed by consolidation waves. Impulse waves surge higher in a short amount of time and consolidation waves serve to digest the surge in price as a momentary level of equilibrium is met. Once a consolidation wave is completed, a new impulse wave can develop. Long-trending bull markets are littered with such price action.

Impulse waves have a high tendency to mirror the prevailing impulse wave, and it is one of the reasons that many patterns contain such symmetry. This logic is applied to both bullish and bearish breakouts of a consolidation wave. Using this premise, with the details taken from the chart above, a bullish break would generate a target of $14.50 for Square stock, while a bearish breakdown would essentially mean a re-test of the 2016 lows.

The Bottom Line on Square Stock

I am bullish on Square stock, and the charts give me reason to believe that the bullish trend has only begun in earnest. October has been known as a month plagued with market volatility, so if SQ stock can maintain its current position within the consolidation pennant pattern, the bullish implications are mind-numbing.