Etsy Stock: Anxious Moments
I started covering Etsy Inc (NASDAQ:ETSY) stock in early July, just as bullish tailwinds began swirling around this investment. I was fortunate enough to identify the bullish developments that had suggested that a bottom had been formed in Etsy stock.
The surge in Etsy stock that occurred in August came as no surprise, as I was expecting a bullish move to develop. My expectations are formed using technical analysis. This style of investment analysis uses past volume and price data to discern trends and forecast future prices. I have yet to find a better form of analysis that can be used to set up strategic and timely investment strategies.
The signals and price action on the Etsy stock chart suggested that a bullish view was warranted, but now there have been a number of developments that are suggesting that my bullish view on Etsy stock is now in jeopardy.
The following Etsy stock chart illustrates the price action year-to-date.
Chart courtesy of StockCharts.com
My bullish view on Etsy stock began when a golden cross was generated in early July. A golden cross is a bullish signal that is produced when a 50-day moving average, highlighted in blue, crosses above a 200-day moving average, highlighted in red. Traders use this signal to confirm that a bull market is on the horizon, and it is not uncommon for a price to accelerate in the predominant trend after such a signal is given. The surge in price in early August is a perfect example of price acceleration.
I now have concerns that this bullish signal could be in jeopardy of averting because Etsy stock is trading below the 50-day moving average. This is causing the moving averages to converge. In order for the golden cross to remain intact, ETSY stock needs to trade above the 50-day moving average.
The problem is that this moving average is now acting as resistance, and any attempts to break above it have been thwarted.
Etsy stock remains above the 200-day moving average, and that is a plus. The 200-day moving average is the dividing line between stocks trading in a bull market versus stocks trading in a bear market. As long as Etsy stock is trading above this moving average, a bull market and higher prices are a still a possibility.
The trading action that has confined the price between these two moving averages since early November has created a trading pattern. This pattern will determine which moving average will be put to the test and possibly be broken.
The following Etsy stock chart illustrates the consolidation pattern that has developed.
Chart courtesy of StockCharts.com
Trading action on the Etsy stock chart is littered with impulse waves (highlighted in green) that are followed by consolidation waves (highlighted in purple). impulse waves take the price to new heights and consolidation waves serve to alleviate any overbought or oversold conditions that were created. These patterns are especially useful for traders looking to define their risks, as well as looking to find applicable entry and exit points.
In my last report on Etsy stock, I outlined how a consolidation pattern had developed in August and September, and I stated that this pattern would determine the next direction that Etsy stock would take. This consolidation pattern broke out, suggesting a bullish outcome, but then the pattern quickly failed.
This is an example of how a consolidation pattern can also manage risk. When Etsy stock traded back within the consolidation wave, this was the first sign that the bullish pattern was failing. The second sign, and confirmation, was when Etsy stock closed below the support level that was outline by the consolidation channel.
Failed signals are not to be ignored, as they are extremely powerful signals. The impulse wave that pushed Etsy stock lower after the failed signal was also not a surprise.
At the current juncture, another consolidation wave is now in development, and once again this pattern will determine the next direction that Etsy stock will take.
A breakout will also coincide with a move above the 50-day moving average, and the bulls would rejoice as they would once again have gained complete control of Etsy stock.
A breakdown would coincide with a break below the 200-day moving average, and the bears would be flexing their muscles, as this would mean that the bears have once again taken control of Etsy stock.
The prevailing impulse wave was to the downside, and this increases the likelihood that the current consolidation wave will break to the downside. If such a result does develop, Etsy stock could fall toward the $9.00 level before any support is found.
Bottom Line on Etsy Stock
The bullish signals that began to swirl earlier this year for ETSY stock have begun to subside, and my bullish view on the stock is now in jeopardy.