CDNS Stock: Anticipating a Trend Reversal
Since October 5, 2018, I have assumed the role of the bearer of bad news. I take no pride in playing this role, but honesty is always the best policy, and when it comes to investing, it pays to be right on the right side of the trade.
If you’re just tuning in for the first time, since early October, I have been adamant in expressing my opinion that the markets are the process of putting in a significant top as they transition from a bullish trend into a bearish one.
This is why I have been focusing on a number of stocks and labeling them as “broken.” The characteristic that these stocks share is that their bullish trends have given way and they have begun to roll over.
Because stocks do not all top at the same time, this has led to the choppy trading action we are now becoming all too familiar with.
For this article, I am focusing on Cadence Design Systems Inc (NASDAQ:CDNS) stock because I believe it is in the process of putting in a significant top.
In order to confirm my beliefs, the technical price pattern highlighted on the following Cadence Design Systems stock chart would need to be resolved in a bearish manner:
Chart courtesy of StockCharts.com
The pattern captured above is called a “rising wedge,” a price pattern that is created when the price action is characterized by a series of marginal higher highs and marginal higher lows. This price action is also the quintessential characteristic that defines a bullish trend.
What sets a rising wedge apart from a conventional bullish trend is when the peaks and troughs are connected using trend lines, the end result is two upward- sloping converging trend lines depicting a wedge.
These trend lines are important because they define the parameters of this pattern by pinpointing where price resistance and support reside. In order to complete the pattern, CDNS stock needs to exit the pattern.
Breaking above price resistance would suggest that higher stock prices are likely to follow, while breaking below price support would suggest that lower stock prices are headed our way.
I, for one, happen to believe that rising wedge is going to be resolved to the downside, based on that being the average result.
This reason is that a rising wedge requires a constant flow of buying pressure just to keep the stock price contained within it. Any lack of said pressure causes the bottom to fall out, which is why this price pattern is also referred to as a “bearish rising wedge.”
The market conditions are also not doing CDNS stock any favors, as the indices are inundated with selling pressure at the moment, which only reinforces the potential for a downside break.
Beside the market conditions, the reason why I believe that CDNS stock is putting in a significant top is because a number of negative divergences have shown up on Cadence Design Systems’ stock chart. These divergences are suggesting that the current bullish trend in CDNS stock is starting show cracks, which is why it is susceptible to a trend reversal.
The negative divergences I am referring to are highlighted below:
Chart courtesy of StockCharts.com
This stock chart illustrates that CDNS stock has been creating the stair step price action that bullish trends are so famous for.
As this trend was in development the relative strength indicator (RSI), and the moving average convergence/divergence (MACD) indicator accompanied the highs created by CDNS stock by creating highs of their own.
The RSI is used to determine whether a stock is experiencing an overbought or underbought condition. The MACD, meanwhile, is a momentum indicator that determines whether bullish or bearish momentum is influencing the price action in a stock.
These indicators can be used in a number of ways; in this circumstance, I am using them to confirm the validity of the trend that is currently in development.
As I mentioned, as Cadence Design Systems’ stock price was making higher highs, these indicators followed suit, making highs of their own.
This substantiated the move towards a higher stock price, suggesting that the trend was embedded and further gains were ahead.
Those gains came in July and August 2018, as CDNS stock went on to make new highs. The problem is that this time around, both the RSI and the MACD indicator failed to follow suit.
Instead, they both ended up making lower highs. This is what is referred to as “negative divergence,” and when this occurs, it implies that the recent shift in favor of higher prices is lacking conviction, and therefore the stock price is prone for a reversal.
If the rising wedge is resolved to the downside, this event would also break below the uptrend line highlighted on the chart above.
This line was created by simply connecting the higher lows that were responsible for creating this stock’s bullish trend.
This simple uptrend line acts as significant level of price support, and if CDNS stock were ever to break below it (like I am anticipating), this event would suggest that the bullish trend that preceded it has run its course, opening up the door for a bearish one.
There are a number of indicators currently suggesting that Cadence Design Systems stock is in danger of putting in a top.
In order to confirm what these indications are suggesting, CDNS stock would need to close below $40.00. This will ultimately confirm the trend reversal has taken place, with lower stock prices likely to prevail as a result.