The Bears Have Overstock Stock Surrounded

overstock stock
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OSTK Stock’s Path of Least Resistance Is Toward Lower Prices

Trade wars are center stage, and it is giving investors anxiety. As a result, volatility levels are high and rising. Violent market swings are becoming a daily occurrence. Like emotions, the violent swings that accompany high volatility do not last forever. When they subside, the market will again fixate on moving higher.

Volatility events such as the current one are transnational in nature. If a bull market is still in development, new leadership will emerge and the sectors that led the market prior to the volatility event will continue to correct.

Last year was filled with a number of sectors leading the charge, but one stood out in particular. 2017 was the year when cryptocurrencies and blockchain became the talk of the town, and a new class of nouveau riche emerged. The enthusiasm for this sector drove the Overstock.com Inc (NASDAQ:OSTK) stock price soaring by 265.14% last year.

I am focusing on Overstock stock because a number of developments have transpired on a technical level which are suggesting that this market darling of 2017 has put in a top and that lower OSTK stock prices are likely to prevail.

The first set of technical developments suggesting that a correction was in development is highlighted on the following Overstock stock chart.

Chart courtesy of StockCharts.com

The first indication suggesting that a correction in OSTK share prices was set in place was when the uptrend line was broken in January 2018.

An uptrend line is a tool that is used to define a bullish trend, and it is characterized by a series of higher highs and higher lows. Connecting the sequence of higher lows creates the uptrend line, which not only defines the bullish trend in OSTK stock, it defines significant levels of price support.

Support was tested in September and November 2017, and it finally gave way in January 2018, suggesting that the bullish trend in Overstock stock had come to an end. The notion that a correction was on the horizon was reinforced by the moving average convergence/divergence (MACD).

MACD is a trend-following indicator that distinguishes between bullish and bearish momentum, using the crossing of a signal line. Bullish momentum suggests that a stock is geared toward higher prices, while bearish momentum suggests that an investment is geared toward lower prices.

This signal is very influential because a stock cannot sustain a move in either direction unless the applicable momentum is supporting it.

The bullish trend began when a bullish MACD signal was generated in July 2017. A week after the uptrend line was broken, a bearish signal was generated.

These coinciding indications suggest and support the notion that lower Overstock stock prices are now in development, which will only be negated once a bullish MACD signal is generated.

If these coinciding indications were not bearish enough, a technical price pattern was completed shortly after, which also supports the notion that lower prices are ahead.

This completed technical price pattern is highlighted on the following Overstock stock chart.

Chart courtesy of StockCharts.com

This OSTK stock chart highlights a technical price pattern known as a head and shoulders pattern, which was completed in March 2018.

A head and shoulders price pattern is identified by its shape. It contains three troughs and a neckline. The middle trough, the head, is the largest, and the first and third troughs are usually of equal size. The neckline is the significant level of price support (highlighted in blue in the above chart), which is responsible for creating the pattern.

In March, Overstock stock broke below the neckline, completing the head and shoulders pattern. This suggests that the predominant trend had reversed course and that lower prices were on the horizon.

The only solace for Overstock bulls is that the current slide toward lower prices has found support on the 200-day moving average.

The 200-day moving average acts as a dividing line that separates a stock trading in a bull market and a stock trading in a bear market. As long as OSTK stock is trading north of this moving average, one could argue that a bull market is still in development.

The share price would need to stay above this metric to even have a chance at negating all the bearish signals that have been recently generated. There is a chance of this happening, but I have my doubts.

Analyst Take

The indications that I have highlighted on the Overstock stock charts suggest that the path of least resistance is currently geared toward lower OSTK stock prices.

At this time, I have little recourse but to hold a bearish view on this investment until there are indications suggesting that such a view is no longer warranted.