BZUN Stock: Overbought Indications Are Where the Gains Are Made
Baozun Inc (ADR) (NASDAQ:BZUN) stock is an absolute rock star of an investment, and a gift that keeps on giving. This year alone, Baozun stock is up 181.52%, and there is little to suggest that this trend towards higher stock prices is going to end anytime soon. The technical indicators I follow are actually suggesting that higher BZUN stock prices are on the horizon, because that direction continues to be the path of least resistance.
Before I move forward, it is worthwhile to clarify for anyone who has not frequented my work how I generate my views on an investment. I do so by analyzing the price action and internal indicators that are generated on a company’s stock chart. This method of investment analysis is known as technical analysis and it is based on the notion that historical data can be used to project what the future may bring. I have been a student of this method for nearly two decades, and it is the basis of all my investment strategies.
I first expressed my bullish view on Baozun stock on June 9 of this year, when it was trading at $23.23. That original publication can be found by clicking HERE. One of the indicators that was instrumental in generating my bullish view has become embedded, indicating that the trend towards higher prices is set to continue.
The following Baozun stock chart illustrates the embedded indicator I am referring to.
Chart courtesy of StockCharts.com
The focus on this BZUN stock chart is the embedded relative strength indicator (RSI).
RSI is an oscillator that is used to identify whether an investment is overbought or oversold. An RSI reading above 70 is overbought, while an RSI reading below 30 is oversold. Using this oscillator is pretty straightforward; once an overbought or oversold level is reached, an indication to act will be generated once the RSI indicator falls back below 70, or finds its footing back above 30.
When the RSI is overbought or oversold and remains there, it is known to be embedded. Much of the gains or losses a stock will endure occur when the RSI indicator is embedded.
For example, in August 2016, the RSI indicator crossed above 70, indicating that BZUN stock was overbought. This overbought RSI signal remained embedded until mid-October, where it crossed back below 70, indicating that the run towards higher prices had finally concluded. While the RSI indication was embedded, Baozun stock appreciated to the tune of 66.67% as it ran from a low of $9.00 to a high of $15.00. This is just one example that reinforces the notion that much of the gains an investment makes happen while the RSI indicator is embedded.
In May of this year, the RSI indicator crossed above the 70 overbought level and has remained embedded above it. This time around, the stock price has appreciated to the tune of 94.17% as it has run from $17.50 to $33.98. The RSI indication remains embedded, suggesting that there is room to tack on further gains to this performance number.
The price action on the following BZUN stock chart also supports the notion of higher stock prices.
Chart courtesy of StockCharts.com
This BZUN stock chart illustrates the constructive price action that is suggesting that higher prices are on the horizon.
Constructive price action consists of impulse waves and consolidation waves. These waves in an alternating wave structure create the necessary building blocks to build and sustain a trend.
The impulse wave, which is highlighted in green, serves to define the period in the bullish trend where the stock price stages an advance.
The consolidation wave, which is highlighted in purple, serves to define the period in the bullish trend where gains are digested in order to alleviate overbought conditions. Unwinding overbought conditions creates the necessary environment for a new impulse wave to develop.
The stock chart illustrates that Baozun stock has just exited the consolidation wave in an upward direction. This feat is highlighted on the stock chart as a “breakout.” This breakout serves to suggest that the consolidation wave is now complete and a new impulse wave is set to take its place.
The completion of the consolidation wave and the embedded RSI indicator are a good compilation of indications that higher stock prices are still in order.
I am bullish on Baozun stock and continue to believe that higher stock prices are on the horizon. This view is contingent on the RSI indicator remaining embedded, while the price action on the BZUN stock chart remains constructive.