P Stock: One More Obstacle Remains
We have just entered that infamous month of May where, in some investment circles, it is advised to “Sell in May and go away.” Whether or not this rhetoric will come true this year is something that will have to be seen, but in light of it, I am focusing on a stock that suggests otherwise.
I am focusing on Pandora Media Inc (NYSE:P) stock because it has just completed a compelling price pattern, which is implying that Pandora stock has just put in a significant bottom. This pattern was confirmed on May 4, 2018, following a better-than-expected earnings report that resulted in Pandora’s stock price leaping higher by 19.83% on the day, perhaps putting a damper on selling in P stock in May.
The pattern in question is highlighted on the following Pandora stock chart.
Chart courtesy of StockCharts.com
The technical price pattern highlighted on the Pandora stock chart is a bottoming pattern called a saucer bottom.
The price action that characterizes this technical price pattern captures the progression of a stock transitioning from a bearish trend into a bullish one. This progression from one trend to another creates the rounded bottom that depicts this pattern.
This pattern was created because a significant level of price resistance, which resided at $5.50, prevented the stock price from advancing behind it. This level was first established in November 2017, following a disappointing earnings report, and for the next six months, Pandora stock was contained below it.
On April 30, 2018, P stock was finally able to sustain a close above resistance, completing the pattern and suggesting that higher prices were likely to follow. It did not take long for this move to manifest; on May 4, 2018, following Pandora’s better-than-expected earnings report, P stock gapped higher.
This gap up is significant just like the gap down in November 2017 was significant. This price gap implies that the saucer bottom pattern is also an island reversal pattern, reinforcing the notion that Pandora stock has just put in a very significant bottom.
The notion of a significant bottom is being reinforced by a technical indicator, which is highlighted on the following P stock chart:
Chart courtesy of StockCharts.com
The technical indicator reinforcing the notion that a significant bottom has just been put in is the relative strength indicator (RSI).
RSI is used to determine whether a stock is overbought or oversold, using an oscillator that fluctuates between 0 and 100. When the RSI oscillator is above 70, that translates into an overbought reading, and when the RSI oscillator is below 30, that translates into an oversold reading.
A reading doesn’t become a signal until it returns from one of these extreme signals. Let me explain. When the RSI crosses above 70 and then crosses back below it, it creates a bearish signal. When the RSI crosses below 30 and then crosses back above it, it creates a bullish signal. In each case, the signal suggests that the trend that preceded it has run its course and that a new trend has begun.
The signals highlighted on the P stock chart are a testament to this notion.
In March 2014, a bearish RSI signal suggested that the bullish trend that preceded it had run its course and that a move toward lower prices was likely to follow. A bearish trend did indeed follow.
This bearish trend, which has been in development for three-and-a-half years, contains the quintessential characteristic that defines all bearish trends, which is price action consisting of lower lows and lower highs.
Earlier this year, the RSI generated a bullish signal, suggesting that the bearish trend that preceded it had run its course and that higher prices were likely to follow. The completed saucer bottom is reinforcing this notion, so I can say with confidence that a significant bottom has been put in.
There is still one obstacle that needs to be taken out in order to confirm that the development of a new bull market has begun. This obstacle is the downtrend line, which is highlighted on the P stock chart.
This downtrend line was created by connecting the series of lower highs that characterized this bearish trend. The downtrend line acts like a level of price resistance.
This downtrend line is significant because it has thwarted all previous attempts to move beyond it. This level currently resides at $8.60, and in order to suggest that a new bull market is in development, Pandora stock needs to break above this level of price resistance, which is likely to be tested in the not-too-distant future.
A number of technical indications are suggesting that Pandora stock has put in a significant bottom, and in order to confirm that a new bull market is in development, P stock needs to break above the downtrend line, which currently resides at $8.60.