AAOI Stock: Looking for a Bottom
Applied Optoelectronics Inc (NASDAQ:AAOI) stock is a perfect example of the expression, “what goes up must come down,” because that is exactly what happened to AAOI stock in 2017. It began the year at $23.71, and after an incredible run to the upside, where it peaked at $103.41, it only managed to hold on to enough gains to finish off the year at $37.82.
I’m not here to rub salt in anyone’s wounds. On the contrary, I am focusing on AAOI stock because I have the inclination to believe that the stock has reached an important inflection point where it can gather its footing and once again make a move toward higher stock prices.
This inflection point I am referring to is highlighted on the following stock chart.
Chart courtesy of StockCharts.com
This stock chart illustrates the inflection point I am referring to and it was defined using the previous all-time high, which resided at $28.00.
This AAOI stock chart illustrates that when Applied Optoelectronics stock breached its previous all-time high, it set off a fury of buying pressure that propelled the stock price to appreciate by 267.86% in six months.
This move toward higher prices was not an accident and this event was set off after it broke above a long-standing all-time high. Creating a new-all time high creates a dynamic where everyone who is holding a short position is inclined to cover because the entire group is underwater.
This demand for AAOI stock is compounded by demand created by momentum investors who like to chase performance. Add in the notion that there is no overhead resistance to contain the stock price from advancing, and this creates the perfect environment for a stock to appreciate. To reiterate, some of the most exciting moves to the upside have been created under such exact circumstances.
This dynamic is what fueled the move in AAOI stock. After peaking in July 2017, the stock has been caught in a painful downdraft. In February 2018, Applied Optoelectronics stock has gone full circle and it has come way back to test the previous all-time high. Returning to test a previous level of price resistance is known as a backtest and this type of price action is very common as it serves to reaffirm that the break above resistance was legitimate while simultaneously establishing this level as a new level of price support.
If this is indeed a new level of price support as suggested, then this is where Applied Optoelectronics stock is likely to find its footing and stage a move toward higher stock prices.
In anticipation of such a scenario, I will be watching an influential momentum indicator that is highlighted on the following stock chart, which I believe will confirm the notion that the trend has reversed toward higher prices.
Chart courtesy of StockCharts.com
The focus of this stock chart is the moving average convergence/divergence (MACD) indicator.
MACD is an effective indicator that uses the crossing of a signal line in order to distinguish whether bullish or bearish momentum is influencing the trading action in a stock. Momentum is a very significant factor because a stock cannot sustain a move in either direction without the applicable momentum supporting it. Therefore, it is very instrumental when investors know which way it is geared toward.
For instance, in July 2016, a bullish MACD cross was generated, implying that bullish momentum was influencing the trading action in Applied Optoelectronics stock suggesting it was geared toward higher prices. The MACD indicator was in bullish alignment for 12 months and during that time, AAOI stock appreciated to the tune of 490.90%.
In the process of creating these gains, a bearish cross was averted on three occasions. Each time, the stock price accelerated higher. These instances are a testament to the significance of the MACD indicator in relation to AAOI stock.
In July 2017, a bearish MACD cross was finally generated and Applied Optoelectronics stock has been in the grips of a correction ever since. I believe that a bullish MACD cross will be the catalyst that finally implies that the correction has run its course. Therefore, higher stock prices can finally prevail.
Now that the previous all-time high is in the process of being tested, I believe that such a scenario is set to play out in the near future and I am keenly watching the MACD indicator.
Applied Optoelectronics stock is currently testing a very important level of price support. I believe that AAOI stock can regain its footing on this level and finally stage a move toward higher prices. In order to confirm this notion, I am watching and waiting for a very influential momentum indicator to suggest that the path of least resistance is once again geared toward higher prices.