ETSY Stock: Staging a Constructive Advance
After a slow start to 2017, Etsy Inc (NASDAQ:ETSY) stock is beginning to make real strides. This is not my first foray into Etsy stock; last summer I outlined key developments that were supporting a bullish view.
This view was not met without criticism, but the move that followed quickly silenced the skeptics. ETSY shares had an impressive advance that saw its stock price move from $9.94 to a high of $14.57 in as little as eight trading days.
That original bullish view was generated by analyzing the price action on the company’s stock chart. For anyone not familiar with this type of investment research, it is called technical analysis, and it is predicated on using historical data points in order to project the direction an investment is trending in.
Over the last couple of months, I have returned to focus on Etsy stock because the price action has become quite constructive, which is suggesting that an advance is now underway.
The following stock chart illustrates the bullish price action that occurred following news on May 16 that activist investors were taking action in order to extract value from the company.
Chart courtesy of StockCharts.com
The price chart illustrates the fact that the news of these activist investors caused the stock price to gap. This gap is marked as a “breakaway gap” because gaps such as these rarely get filled, and almost always indicate that a new trend has begun.
Following the breakaway gap, a technical price pattern known as a “pennant” quickly formed. These patterns are created by using two converging trend lines that serve to represent respective levels of support and resistance. Once the price breaks above resistance or below support, it will dictate the direction that the investment is heading in next.
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The rule of thumb for pennant formations is that they have a tendency to break out in the direction suggested by the predominant trend. As a result, these patterns are viewed as continuation patterns that reinforce the predominant trend.
The pennant that formed in May following the breakaway gap was resolved in a bullish manner and, after a brief advance, another pennant is now forming. The predominant trend suggested by the breakaway gap is toward higher prices, and therefore I can only assume that this pennant will also resolve itself in a bullish manner. This price action continues to reinforce the notion that Etsy shares are staging a bullish advance.
The following Etsy stock chart illustrates indications on a longer-term scale that are also suggesting that an advance is underway.
Chart courtesy of StockCharts.com
This Etsy stock chart is a perfect example of constructive price action that is being supported by a bullish momentum indicator.
Constructive price action consists of an alternating wave structure that contains impulse waves and consolidation waves.
An impulse wave, which is highlighted in green on the chart above, serves to define the stage in a bull market when an investment stages a swift and orderly advance.
A consolidation wave, which is highlighted in purple on the chart above, serves to define the stage in a bull market where the previous gains are digested, and overbought conditions are alleviated. This wave creates the necessary conditions for a new impulse wave to develop.
These waves feed off each other, which allows a trend to remain stable and sustainable. Aside from suggesting that the stock price is set to advance, this alternating wave structure can be used to identify a potential price objective for the current impulse wave that is now in development. It is assumed that impulse waves that are separated by a consolidation wave tend to mirror each other in terms of length. If we apply this assumption to the price action on the chart above, it produces a potential price objective of $20.00.
The momentum indicator located in the lower panel labeled “MACD” has a tremendous track record of identifying and confirming the wave that is in development. Moving average convergence/divergence (MACD) is a trend-following momentum indicator that is used to distinguish between bullish and bearish momentum by using the crossing of a signal line.
In December 2015, a bullish MACD cross preceded an impulse wave that saw the price of Etsy stock double. In October 2016, this bullish MACD signal gave way to a bearish MACD cross that halted any further advances, and correctly suggested that a consolidation was in development.
In May 2017, a bullish cross was generated, indicating that an advance was set to ensue, and an impulse wave has developed as a result. The MACD indicator has correctly identified which wave was is in development, which makes this indicator an effective and important timing tool.
Bottom Line on Etsy Stock
I am bullish on Etsy stock because the method of analysis I employ to generate a view on an investment suggests that this view is warranted. I will continue to hold a bullish posture until there are indications that a different view is warranted.