GILD Stock Is Like a Falling Knife
Gilead Sciences, Inc. (NASDAQ:GILD) reported earnings after the close of business on February 7, 2017 and even though the company managed to beat both on the top and bottom lines, GILD stock has been trading sharply lower by 9.53%.
The forward guidance on fiscal 2017 revenues was a complete disappointment, and this is where the selling pressure is stemming from. This puts Gilead stock in a precarious technical position.
I have been bearish on Gilead stock for some time, and this view is generated by interpreting the indicators and price action on the GILD stock chart using technical analysis. Technical analysis is a method of analyzing an investment using historical price and volume data to discern trends and forecast future prices.
In my previous publications on Gilead stock, I have been focusing on a specific technical price pattern that has been putting pressure on GILD stock.
The following Gilead stock chart illustrates this very large technical pattern.
Chart courtesy of StockCharts.com
The very large technical pattern that has been putting pressure on Gilead stock is a bearish pattern that is referred to as a “rounded top.” A rounded top is a slow progression from a bullish trend to a bearish one. The slow progression is what gives this pattern its rounded shape.
The shape of the pattern is directly correlated with how tops and bottoms are created. Bottoms tend to be created when fear grips the markets. Spike lows are a more common occurrence, because fear tends to dissipate quickly. Tops, on the other hand, involve greed, and this emotion takes longer to dissipate. As a result, rounded tops are more common than “rounded bottoms.”
The rounded top is nearing completion, and this event would mark the beginning of a bear market that could potentially drive GILD stock much lower.
The moving average convergence/divergence (MACD) indicator, which confirmed that a bearish view was warranted in March 2015, remains firmly intact. MACD is a simple and effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish momentum signals.
The bearish cross indicated that the bulls had relinquished all control to the bears, and that the bears were in control of GILD stock. I always found it wise to trade in the direction of this indicator because it suggests which direction is the path of least resistance.
The MACD signal lines have breached the zero line and, if a rally doesn’t ensue very soon, the bearish pressures suggested by this signal will mount, and a steeper sell-off in Gilead stock will be the likely outcome.
The following Gilead stock chart illustrates a pattern that suggests that sharply lower prices are now a real possibility.
Chart courtesy of StockCharts.com
The Gilead stock chart above is littered with bearish indications. The earliest bearish signal was generated in October 2016, when the faster 50-day moving average crossed below the slower 200-day moving average. This signal is known as a “death cross.”
Traders use the death cross signal to confirm that a bear market is lurking. It is not a coincidence that the rounded top technical pattern began cresting shortly before this signal was generated.
The price action that followed the death cross had seen the price contained within a technical pattern called a “falling wedge.” This constructive pattern is created with two converging trend lines, in which one trend line represents support and the other represents resistance. This falling wedge pattern is complete when GILD stock exits the pattern in either an upward or downward direction.
The reaction following the earnings report illustrates that the price has exited the pattern in a downward direction, via a breakdown. This price action suggests that the weakness in Gilead stock price is going to accelerate to the downside.
Bottom Line on Gilead Stock
The reaction to the disappointing earnings report has completed a technical pattern that suggests that further weakness in Gilead stock can be expected, and that a bearish view on GILD is warranted.