These Indicators Suggested Optoelectronics Stock Sell-Off Was Looming

AAOI Stock
Credit:iStock.com/seksan mongkhonkhamsao

AAOI Stock: Abiding by the Technical Indications

From my experience working in private wealth management, people assume that, just because the stock market is making new all-time highs on a daily basis, every stock is doing well. Then, when they look at their portfolios, they are puzzled as to why some of their positions have not succeeded.

This is why I am now focusing on Applied Optoelectronics Inc (NASDAQ:AAOI).

AAOI stock had an epic start to the year and, at one point, it was up as much as 341.17% before a correction ensued. This correction has been quite significant, and any ill-timed entries into Applied Optoelectronics stock would have created painful losses. From the peak that was created in July, this is currently down 66.96%, making this quite the volatile investment.

Many of these losses could have actually been avoided by using the cues set out by technical analysis. Technical analysis is a method of investment research that is predicated on the notion that historical data points can be used to create indicators, which can be used to forecast what the future may bring.

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This is my preferred method for analyzing a potential investment, because, when it is applied correctly, the results are both significant and outstanding.  If you follow my work, then perhaps you can attest to this notion.

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There were a number of technical indicators and developments that were supporting the epic advance in AAOI stock, and these same technical indicators and developments also suggested that a correction was set to ensue.

The following Applied Optoelectronics stock chart illustrates these technical indicators and developments.

Applied Optoelectronics stock chart

Chart courtesy of StockCharts.com

This stock chart contains a beautiful bullish trend that advanced the price from a low of $8.08 in May 2016 to a high of $103.41 in July 2017. If you’re wondering, this represents a 1,179.83% return.

This trend contained the quintessential characteristic that defines all bullish trends, which is a sequence of higher highs followed by higher lows. This bullish trend is captured by using a simple uptrend line that was created by connecting the sequence of higher lows. Using this uptrend line is quite easy and, as long as Applied Optoelectronics stock is trading above it, the only presumption that can be made is that the trend is intact and that higher prices will prevail.

This bullish trend was supported by an influential indicator known as the moving average convergence/divergence (MACD) indicator. The MACD indicator is used to distinguish whether bullish or bearish momentum is influencing the trading action in a stock.

This indicator is very importation because, in order to stage a move toward higher stock prices, bullish momentum is required. The same can be said about a move toward lower stock prices.

In July 2016, a bullish MACD cross was generated, which indicated that the bullish momentum was influencing the Applied Optoelectronics stock price. This bullish momentum created a path of least resistance that was geared toward higher stock prices. That’s when the bullish trend outlined by the uptrend line began its development.

It is presumed that, as long as this indication is in bullish alignment, higher AAOI stock prices will prevail. In this circumstance, the indicator remained in bullish alignment for 13 months. Whenever it was in danger of creating a bearish MACD cross, the stock price quickly staged an advance and averted this bearish indication.

Averted indications are powerful signals and, every time one occurred, it caused this stock to appreciate by a significant amount. There were three averted signals that fueled this epic move.

These bullish indications that supported this advance finally gave way in August, when the uptrend line was broken to the downside and a sustained bearish MACD cross was generated. This marked the end of the bullish trend, and a bearish trend quickly engulfed AAOI stock.

In order to suggest that the current trend toward lower prices has finally concluded, a bullish MACD cross is needed, so I will be on the lookout for the generation of this signal.

Analyst Take:

The bullish trend toward higher Applied Optoelectronics stock prices was supported by an uptrend line and a bullish MACD cross. These indications finally gave way in August, and a significant correction toward lower stock prices has ensued.

In order for me to suggest that a new bullish trend is in development, I will be looking for the generation of a bullish MACD cross.