CUDA Stock: Anticipating the Next Move
As the title suggests, Barracuda Networks Inc (NYSE:CUDA) stock has reached an important inflection point and the next major move in CUDA stock will depend on how Barracuda stock will react after this very important level of resistance is tested.
This resistance level was created shortly after I published my last report on this company: “An Explosive Move in Barracuda Stock Is Imminent.” In that report, I outlined that a technical price pattern was in development that carried powerful implications once it was resolved. My inclination was for this pattern to resolve itself in a bullish manner, so boy was I surprised on April 18, when CUDA shares closed lower by 15.81%. This unexpected drop was due to a lackluster earnings report where management lowered their excepted earnings guidance for the quarters going forward.
In the days that followed, Barracuda stock staged an advance. This advance has completely erased the entire drop, and CUDA shares are right back where they started. This starting point marks the inflection point. Moving above it would suggest that the drop was ill-advised, and therefore the bullish trend is set resume. Otherwise, this inflection point will turn out to be a sufficient level of resistance and a move lower will confirm that a larger correction is set to develop.
The following Barracuda stock chart illustrates this inflection point and how it was developed.
Chart courtesy of StockCharts.com
On April 18, CUDA stock gapped lower, and in this process, the uptrend line and the 200-day moving average were broken.
The uptrend line defined the bullish run towards higher prices that began in February 2016, after the share price found its footing and staged an advance. This uptrend line is created by connecting the troughs on the stock chart, and using it is as simple as it was to create.
The uptrend line serves as a dividing line, and as long as the share price was trading above it, I could only assume that higher stock prices were likely to prevail. Breaking below it would suggest that the advance that began in February of last year has concluded, and a larger correction is set to ensue.
The same bearish implications are being suggested by the 200-day moving average. This moving average is a very popular tool used by investors because, like the uptrend line, this tool is used to separate healthy bullish investments from unhealthy bearish investments.
Both of these metrics were supporting the bull market advance, and both were broken on the same day. This is why such a violent reaction occurred on April 18. That day also marked the low, and the share price has since staged an impressive advance.
That advance is now testing the 200-day moving average from beneath. The 200-day moving average is now acting as, and defining, the inflection point. In order to even suggest that a bullish advance is in the making, CUDA stock needs to break above this inflection point.
The following Barracuda stock chart illustrates that a bullish resolution of the inflection point has the potential to set off a number of bullish indications.
Chart courtesy of StockCharts.com
There are two key factors that are highlighted on the CUDA stock chart above.
The first factor is that the price action off the February 2016 lows has remained constructive. Constructive price action is considered bullish because it creates the necessary ingredients to sustain a trend. These ingredients are an alternating wave structure.
The first wave of this wave structure is an impulse wave, and this is where the stock stages its advance. This advance is characterized by a swift linear move towards higher prices.
The second wave of this alternating wave structure is a consolidation wave, and this is where any overbought conditions that were created in the previous advance are alleviated. Alleviating an overbought condition is necessary in order to create an environment where a new advancing impulse wave can develop.
A new impulse will develop once the stock price exits the consolidation wave in an upward direction, indicating that the wave is complete. This action requires higher stock prices and therefore requires that CUDA stock breaks above its 200-day moving average, which is defining the inflection point.
The moving average convergence/divergence (MACD) indicator is converging and a bullish resolution of the inflection point will cause a bullish cross to occur. MACD is trend-following momentum indicator that is used to distinguish between bullish and bearish momentum. This indicator is very effective in confirming the next wave that is set to develop.
In February 2016, a bullish cross was generated, indicating that bullish momentum was paving the road towards higher prices. Barracuda shares appreciated from $11.00 to $22.00 while this indication was engaged, confirming that an impulse wave was in development.
In November 2016, a bearish cross was generated, indicating that bearish momentum was acting to contain any further advance, and the share price has been drifting as a result. This indication remains in bearish alignment as the consolidation wave continues to develop.
A price advance would complete the consolidation wave, and simultaneously generate a bullish MACD cross. These indications would support the notion that new highs are likely to follow.
Bottom Line on Barracuda Stock
Barracuda stock has completely undone the decline that followed its disappointing earnings report. CUDA stock is sitting on an inflection point where higher prices will generate a number of bullish indications, suggesting that higher prices are likely to follow. At the same time, lower prices would negate these indications, suggesting that lower prices are likely to follow. Patience is warranted until this inflection point is resolved.