Square Stock Is Getting Heated and This Is What I Am Watching

Square StockSQ Stock: An Accelerated Trend

Following Square Inc (NYSE:SQ) stock and providing my opinion on this investment has been a sheer pleasure because SQ stock has the uncanny ability to paint the price chart in a most precise and incredible way. I have been following this company since last summer, where I first had the inclination to carry a bullish view on Square stock, based on the number of embedded price patterns that were being painted on the stock chart.

I outlined these developments in an August 20 publication titled “Square Inc: SQ Stock is Sending a Flashing Buy Signal.” Since that day, Square stock has appreciated to the tune of 99%, vindicating my bullish view. The recent run has gone on for many months, and I am beginning to wonder if the current trend is getting a tad bit overheated.

In order to clarify the current market environment, I need to return to the indications that generated and reinforced my bullish view in order to gauge whether they are still in bullish alignment. This will determine whether the trend towards higher prices is set to continue.

The following Square stock chart illustrates the precise price action that has defined this current bull market advance.

Square stock chart

Chart courtesy of StockCharts.com

This SQ stock chart highlights an alternating wave structure known as constructive price action. This wave structure consists of impulse waves and consolidation waves.

The impulse waves are highlighted in green, and they serve to define a state of price progression where the stock price advances in a swift and orderly fashion.

The consolidation waves are highlighted in purple, and they serve to define a lack of progress in which the stock price trades against the predominant trend. This price action serves to unwind overbought conditions to set up the required conditions for a new advancing impulse wave to develop.

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These waves feed off each other, creating the necessary cycle for a sustainable trend to develop. This SQ stock price chart is an excellent example of this wave structure creating a bullish trend.

A very interesting dynamic has been occurring within this constructive price action, in which the impulse waves have been $4.00 in length. This began in June 2016, and every impulse wave that followed consistently moved from trough to peak to the tune of $4.00.

The first three impulse waves carried this characteristic, but the most recent impulse wave doubled that projected price move. This doubling is indicative of a trend that is accelerating, which could be suggesting that the trend may be getting overheated. This could possibly suggest that a correction was set to ensue.

The following Square stock chart illustrates other key technical indications that have been supporting this bullish advance.

SQ price chart

Chart courtesy of StockCharts.com

This SQ price chart illustrates that a bullish trend distinctly began in June 2016. This bullish trend is being supported by a bullish moving average convergence/divergence (MACD) indicator and an uptrend line.

MACD is a momentum indicator that distinguishes between bullish and bearish momentum using the crossing of a signal line. In July 2016, a bullish MACD indicator was generated, indicating that bullish momentum was driving the predominant direction that Square stock was trading in. In order for an advance to commence, bullish momentum is needed, and this indicator suggested that bullish tailwinds were swirling around Square stock, creating an environment where the stock was geared towards higher prices.

The uptrend line is used to define this bullish advance and it is simply created by best fitting a trend line using the significant lows on the price chart. This trend not only defines the bullish trend, but also acts as the dividing line between a bullish investment and a bearish one.

Using it as a tool is quite easy, because as long as the stock price remains above this trend line, I can only assume that a bull market is still in development. Falling below this uptrend line would unfortunately suggest that the bullish trend has been terminated, suggesting that lower prices can be expected.

The recent acceleration in the stock price has caused SQ stock to significantly pull away from the trend line, possibly suggesting that the investment is overheated. The MACD cross retaining its bullish alignment suggests that the trend towards higher prices is still intact.

If this indication gives way to a bearish cross, I would have the inclination to believe that, at minimum, the uptrend line will be tested. Whether this uptrend line holds is something that will have to be seen, but given that this uptrend line was created while the MACD indicator was in bullish alignment leaves only speculation as to the possible repercussions this would have on the uptrend line.

What I do know is that the uptrend line is currently providing support at $19.25, which represents a potential 21% decline before support is even tested.

Bottom Line on Square Stock

I have been bullish on Square stock since the summer of last year, and over that time, a bullish trend has developed. The latest leg higher has been out of character and it may be suggesting that the trend is getting bit overheated, which could spark a correction. The indications remain in bullish alignment and support further gains, which overrides any concerns I may have about the progression in SQ stock.