Yelp Stock: Testing Support
I have been bullish on Yelp Inc (NYSE:YELP) stock for some time now, but that bias been pushed back. I now have a neutral bias on YELP stock. The markets are at that point in the year where volatility tends to spike, and many market bottoms have occurred in the month of October. I have reason to believe that the market will endure some type of weakness this October. Very few stocks will be spared, and I do not believe Yelp stock will be one of them.
Technical analysis is the methodology of using historical price data and volume to forecast and discern the direction of stock prices. I have use this style of investment analysis for over a decade now, and this style has served me well. The price chart of YELP stock has given me a signal that suggests that the price may experience some weakness.
This is not to say that the overall picture has become bearish; the signal only indicates that the recent upswing in price has come to a conclusion.
The following YELP stock chart illustrates the signal I am referencing.
Chart courtesy of StockCharts.com
The chart above illustrates the effectiveness of a simple trend line. A trend line is a simple tool, but it is also my most effective one. This trend line served to hold my bullish bias, and now this same tool has given me reason to believe that the bears have gained the upper hand in YELP stock.
The Yelp stock chart above illustrates an uptrend line that has been in force since shares bottomed in mid-February. This trend has been flawless, and it has supported YELP stock during this entire rally higher.
This line was broken in early October, and indicates that the trend toward higher prices has concluded. I would use such a signal to exit, or reduce my position and await a new signal or pattern that can reaffirm a bullish bias.
If I was looking to re-enter on a decline, I would look for an area of support that might halt any further declines. The following YELP stock chart illustrates a major level of support.
Chart courtesy of StockCharts.com
In June, Yelp stock generated a golden cross. A golden cross is a bullish signal that is produced when a 50-day moving average, highlighted in blue, crosses above a 200-day moving average, highlighted in red. As long as this signal is bullish, I can only assume that the longer-term trend is toward higher prices. For this reason, I can only be neutral, or bullish on YELP stock. This indicator is effective in determining which camp is in control, and traders use this signal to confirm that a bull market is in play.
With the golden cross still in bullish alignment, I would be looking for areas of support to enter or rebuild a position. The horizontal line marked on the chart above is a level of support that was once a level of resistance. If Yelp stock does trade back to this level, it would be effectively testing this price level. It is not uncommon for stocks to trade back and test a level that acted as previous resistance. Traders refer to this as a backtest.
When YELP stock originally broke above this level of resistance, it did so in dramatic fashion, as a gap was left on the chart. This gap sits with a low of $36.00. If Yelp stock closes below this price, the gap will most likely close and the major level of support will be tested. The bulls would love to see this level of support hold.
The Bottom Line on YELP Stock
I am neutral on YELP stock, even though the bigger picture is still bullish. The break of trend is a reason I would use to step aside, or reduce a position that I could then reapply when Yelp stock tests support.