SQ Stock: Price Acceleration
In my previous report on Square Inc (NYSE:SQ) stock, I had outlined why I was bullish on SQ stock. I explained that this bullish view was based on the technical pattern that had just completed, but there was one piece of the puzzle still remaining as the price had failed to follow through. Perhaps failed is a harsh word; the pattern remained constructive and it still suggested that a move to the upside was a strong possibility.
I am using this report to update my last report because SQ stock has closed above resistance, and this action constitutes a successful follow-through. If I could elevate my bullish bias, I would, because I believe the breakout I was long awaiting is in the process of playing out and the price is about to accelerate to the upside.
The rationale behind my bullishness and the body of knowledge that I base my investment opinions on is technical analysis. I do not disregard fundamental analysis, as I have spent a great many hours getting a background in that field. I prefer to use technical analysis because I have found price to be the best timing tool. That is something that is not available in conventional fundamental analytics.
The following Square stock chart illustrates the pattern that I have been basing my bullish view on, and this pattern is also suggesting that the price is about to accelerate.
Chart courtesy of StockCharts.com
My bullish view on SQ stock has been based on the healthy price action that occurred off the June 2016 lows.
The Square stock chart above is a prefect example of healthy bullish price action. Healthy price action consists of impulse waves that take the stock price higher, and consolidation waves, where the new higher prices are digested. Consolidation waves are essential in a healthy trend because they alleviate any overbought conditions that may have developed as the stock moved higher. They also act as the pattern that sets up the next impulse wave.
When I scan for potential investments, I am on the lookout for consolidation waves because these patterns are the most constructive with regards to setting up an investment strategy around.
The theory behind impulse waves and consolidation waves is that the consolidation wave acts as a midpoint between two impulse waves. When a consolidation wave is complete, the proceeding impulse wave should mirror the initial impulse wave. This is how I generate targets using price patterns. Applying this theory to Square stock, this creates an initial upside price objective of $15.00.
On Friday, SQ stock followed through on this pattern by breaking above the highest price point that created the consolidation wave. This closing price is indicating that the price is about to accelerate higher and it also increases the odds that the initial price objective of $15.00 can be obtained.
This is also marks the point in time where price can quickly trade back and close below $12.50. If this occurs, it will happen very quickly and would cause me great concern. So much concern, in fact, that I would debate reversing my bullish view on Square stock.
Other signals are supporting my bullish view, so I don’t believe this follow-through in price will fail. The following chart reinforces my bullish view on Square stock.
Chart courtesy of StockCharts.com
There are two distinct signals on the chart above that supported a bullish breakout and they both are currently still in play.
The first signal was generated in September 2016, when the faster 50-day moving average (highlighted in blue) crossed above the slower 200-day moving average (highlighted in red). This signal is known is a “golden cross” and traders use it to confirm that a bull market is on the horizon. When this signal is engaged, bullish setups have a higher probability of succeeding.
The second signal was generated in November 2016, when the on-balance volume (OBV) indicator broke out to a new high. This indicator uses volume to compute buying and selling pressure. It is produced by cumulatively adding volume on up days and subtracting volume on down days.
When the OBV indicator made a new high, it was suggesting that the consolidation pattern would resolve itself in a bullish manner. This indicator has continued to make new highs, indicating that investors are continuing to accumulate SQ stock. Having such a bullish foundation increases the odds of a bullish run developing.
Both of these signals confirm my bullish view, and reinforce my beliefs that the price will soon accelerate.
Bottom Line on Square Stock
My bullish view on Square stock is being reinforced as the price closed at a multi-month high. This closing level is indicating that price is successfully following through on a bullish price pattern. This bullish price action is why I believe that the price of SQ stock is about to accelerate higher.