PANW Stock: Constructive Price Action
Palo Alto Networks Inc (NYSE:PANW) reported stellar earnings after the close of trading on May 31, when it reported record numbers that beat analyst expectations on both the top and bottom lines. This stellar announcement caused Palo Alto stock to surge by 13% in after-hours trading, and PANW stock is currently building on these gains as I write this publication.
This surge in price has done quite a number on the company’s stock chart, and what looked like a lost cause has quickly become constructive. The pillars are now in place in which a significant rally can manifest. This constructive view of Palo Alto stock has manifested by studying the company’s stock chart. This method of analysis is known as technical analysis, and it is predicated on using historical price and volume data to define the predominant trend, which is then used to forecast future stock prices.
The PANW stock chart is presented using the Fibonacci retracement numbers as an overlay.
The following Palo Altos stock chart illustrates that the decline in price suffered by the company’s stock was just a normal pullback within a much larger bullish trend.
Chart courtesy of StockCharts.com
The Fibonacci retracement numbers are a technical tool that is favored by many traders. This tool is used to identify and define where possible levels of support and resistance can manifest. The most popular numbers eyed by traders are the 50% and 62% retracement levels. The popularity of these two numbers has led analysts to coin the term “the box” to describe this level.
The theory surrounding these numbers is that, after a stock completes its primary move, it will retrace that move by approximately 50%–62% before resuming its primary trend. Traders refer to this price action as “trading into the box.”
The recent slide that occurred earlier this year provided enough weakness that PANW shares were finally able to enter the box. This box halted the slide in Palo Alto shares, and the recent earnings announcement provided the fuel to finally stage an advance. This price action is serving to suggest that the slide that began in 2014 was just a normal pullback within the context of a much larger bullish trend.
The price action that generated this decline to test the box has been quite constructive, and it serves to reinforce the notion that a significant rally can now manifest, based on the assumption that the primary bull market in PANW stock is still intact.
The following Palo Alto stock chart illustrates the constructive price action that has the potential to support a significant rally.
Chart courtesy of StockCharts.com
The PANW stock chart above is a perfect example of constructive price action. Constructive price action contains two waves: an impulse wave and a consolidation wave. The alternation of these waves creates the necessary conditions that allow a trend to remain stable and sustainable.
The impulse wave, which is highlighted in green on the chart above, serves as a wave of progression where the stock moves in a linear motion to advance the stock price. The consolidation wave, which is highlighted in purple above, serves to alleviate overbought conditions in order to create the necessary conditions for a new impulse wave to develop.
Palo Alto stock is currently in the development stage of a consolidation wave and, in order to suggest that a new impulse wave is set to develop, the stock price needs to exit this consolidation wave in an upward direction. This requires PANW stock to break above resistance that currently stands at $150.00.
If Palo Alto networks manage to break above this level, I could use the theory behind this wave structure to generate a potential price objective. The theory states that the initial impulse waves should mirror the developing impulse wave where the consolidation wave acts as a midpoint.
Applying this theory to the price action on the chart above produces a possible price objective of $265.00. Let me reiterate that this target is predicated upon the successful completion of the consolidation waves that is currently in development.
The completion of this consolidation wave will coincide with bullish signals from the indicator in the lower panel labeled “MACD.” MACD is the acronym for moving average convergence/divergence indicator. MACD is a momentum- and trend-following indicator that is generated when signal-lines cross. These crosses are used to distinguish between bullish and bearish momentum, which also happens to confirm the type of wave that is in development.
For example, in December 2015, a bearish MACD cross was generated, indicating that bearish momentum was influencing PANW shares. This indication was also instrumental in confirming the notion that the impulse wave had concluded and that a consolidation wave was in development.
This same MACD indicator is currently converging, and a bullish cross can occur. This bullish indication will most likely coincide with the completion of the consolidation wave that is currently in development, which would confirm the notion that a new impulse wave is set to develop
Bottom Line on Palo Alto Networks
Palo Alto stock surged higher following a better-than-expected earnings report. This surge in price has reinvigorated the notion that PANW stock is still within the confines of a larger bullish trend, which means that a large advance may be just around the corner.