JD Stock: Bear Trap
JD.Com Inc(ADR) (NASDAQ:JD) is an online direct sale company in China, and it offers a service similar to that of Amazon.com, Inc. (NASDAQ:AMZN). It may not be on the same level as Amazon, but the consumer base in China dwarfs that of North America and, as a result, there may be some merit in such a speculative company like JD.com. Consumers are migrating to the Internet for their shopping needs, and this is why Amazon.com enjoys such success. This metric should apply to consumers in China as well, which would be good news for JD stock investors.
I use technical analysis as the basis of my investment research for numerous reasons, but none are as important as defining my risk and adding objective timeliness to my strategies. JD stock first caught my eye because of the pattern that developed on the price chart. This stock price pattern was an unconventional and powerful technical indicator.
The powerful indicator I am referring to is actually a failed signal, and it is illustrated on the JD.com stock chart below.
Chart courtesy of StockCharts.com
JD stock does not have a long track record of returns because the stock has not been trading for very long. But for the little time it has spent trading, JD.com stock has managed to put in a descending triangle. A descending triangle is a technical pattern in which the markets trade in a directionless range. Triangle patterns often have five points of contact before the pattern breaks in either an upward or downward direction.
Descending triangles, in particular, are seen in a bearish light, and this is based on the characteristics that make up the pattern. The bearish price action stems from buyers supporting one price at $22.00 and sellers willing to step in at lower levels after each subsequent rally off of $22.00. As a result, on average, these patterns break down.
Point 5 on the JD.com stock chart above illustrates where the pattern broke down and alluded to a bearish outcome. This bearish outcome was quickly averted, and the bearish signal was deemed a failure. Failed signals are significant, and I know of a few traders who only trade on such signals. These signals are particularly powerful, and there is good reason for this. Failed signals cause traders who based their investment decisions on these signals to quickly unwind their positions. This is the only logical course of action for them to take.
This pattern is known to traders as a bear trap. Bear traps are instrumental in indicating a trend reversal, and it’s not a coincidence that JD stock quickly traded higher to test the resistance level identified by the triangle.
The following JD.com stock chart illustrates the developments that occurred shortly after the bear trap.
Chart courtesy of StockCharts.com
Once the bearish signal was averted, JD.com stock surged higher and an ascending channel quickly developed. There are two parallel lines that define this trend, and these trend lines act as support and resistance. The uniformity of this pattern suggests that JD stock will oscillate between these two trend lines for as long as the trend and time permit. This bullish pattern also serves to manage risk. A break below this channel will mark a trend reversal but, as long as this pattern remains intact, the likelihood that the descending triangle breaks upward increases.
In October 2016, JD stock generated a golden cross. A golden cross is a bullish signal that is produced when a faster 50-day moving average (highlighted in blue) crosses above a slower 200-day moving average (highlighted in red). This bullish indicator is used to confirm a bull market is on the horizon. This indicator also increases the possibility that the descending triangle will break out in a bullish manner.
A successful breakout of the descending triangle would target $38.00, which is also the all-time high in JD.com stock.
The Bottom Line on JD.com Stock
I am bullish on JD stock. I believe that the tailwinds created from the failed bearish breakdown and the golden cross will be the catalyst to finally cause JD.com stock to break out of the descending triangle and test the all-time high at $38.00.