CAKE Stock: You Can Have Your CAKE and Eat It Too
The markets are currently lacking any direction, and for the first quarter of this year, they have been caught in a trading range. The trading range was created on the heels of a number of market-moving events that have caused the volatility index to blow out. The low levels of volatility that were so conducive to a bull market in 2017 are nonexistent in 2018.
The good news is that volatility is currently subsiding, suggesting that the market indices are likely setting up for another move toward higher prices. I am focusing on Cheesecake Factory Inc (NASDAQ:CAKE) stock because I believe that this investment is potentially going to be one of those stocks participating in this move toward higher prices.
My inclination toward higher CAKE stock prices is centered around the completed technical price pattern currently suggesting that Cheesecake Factory stock is geared toward further gains.
This completed technical price pattern is highlighted on the following Cheesecake Factory stock chart.
Chart courtesy of StockCharts.com
The completed technical price pattern on the CAKE stock chart is an inverse head-and-shoulders pattern.
An inverse head-and-shoulders price pattern is characterized by three distinct troughs, where the middle trough (the head) is the largest, and first and third toughs (the shoulders) are usually of equal size. This pattern develops because a significant level of price resistance, which is labeled as the neckline, prevents the stock price from advancing.
On April 5, 2018, CAKE stock broke above the neckline, completing the inverse head-and-shoulders price pattern, implying that higher prices are likely to prevail. The bullish repercussions suggested by this pattern are predicated on the notion that the Cheesecake Factory stock price remains above the neckline, which currently resides at $50.50, and does not trade back below it.
CAKE stock is currently testing the neckline from above. This is a common occurrence after a price pattern is completed because the price action serves to reaffirm that the breakout above price resistance was legitimate while simultaneously establishing the neckline as a new level as price support.
Once this test is complete and a new level of price support is established, higher prices are likely to prevail.
This notion of higher CAKE stock prices is magnified when the inverse head-and-shoulders price pattern is taken in context with the price action that preceded it.
The following Cheesecake Factory stock chart illustrates that the completed inverse head-and-shoulders price pattern was just a small piece of a much larger price pattern.
Chart courtesy of StockCharts.com
This Cheesecake Factory stock chart highlights a technical price pattern known as a cup-and-handle price pattern.
Cup-and-handle price patterns are characterized by their two distinct troughs, where the first trough is much larger than the second. These troughs paint a picture on the stock chart that resembles a teacup, hence the name.
The inverse head-and-shoulders price pattern doubles as the handle within this cup-and-handle price pattern. This larger price pattern was created by the same significant level of price resistance that was responsible for creating the inverse head-and-shoulders price pattern. This means that on April 5, 2018, both patterns were completed at the same time, magnifying the repercussions and suggesting that much higher stock prices are likely to follow.
The great thing about price patterns is that aside from just suggesting the next direction a stock is likely to proceed in, they can also be used to create a potential price objective.
This price objective is obtained by taking the depth of the cup and extrapolating that value above the significant level of price resistance that was responsible for creating the pattern. Applying this technique to the pattern highlighted on the CAKE stock chart suggests that $62.00 is a potential price objective for Cheesecake stock, implying that the Cheesecake Factory stock price can appreciate by 20.15% from its current prices.
I am bullish on CAKE stock because a number of embedded technical price patterns have recently been completed, and they are suggesting that Cheesecake Factory stock is likely to appreciate. This bullish view is predicated on the notion that the stock price does not fall back and trade below $50.50 on a sustained basis.