CRM Stock: Bearish Headwinds
Salesforce.com, Inc. (NYSE:CRM) has dropped out of the bid for Twitter Inc (NYSE:TWTR), along with every other company that had any interest in a potential acquisition of the social media company.
The initial news that Salesforce.com was interested in such a venture caught investors off guard, and CRM stock plummeted on that news. I am not convinced, however, that this news caused the weakness in the share price, because, if this was indeed the catalyst that sent shares lower, where was the rebound in the price of Salesforce.com stock after this event was quashed?
I believe that something more sinister is at play, and the price of CRM stock is alluding to this.
Price is an important indicator, and I have been using it as the framework of my analysis. To clarify, I use technical analysis as the basis of my investment strategies, and this body of knowledge is reliant on price and volume data. This data is used to discern trends and forecast future price movements.
The Salesforce.com stock price chart has been alluding for some time that bearish headwinds are prevailing and that the bears are in control of CRM stock. It is these factors that have produced my bearish view on CRM stock, as explained below.
The following Salesforce.com stock chart illustrates the break of a trend line that initiated my bearish view.
Chart courtesy of StockCharts.com
The blue trend line highlighted on the chart above represents the uptrend in CRM stock. This line was used to define the bullish move in CRM stock that effectively took this investment from just under $25.00 to just north of $80.00.
In 2016, this uptrend line was broken, which indicated that the bullish move that began in 2012 had abruptly been terminated. The rally back to test the trend line serves as a backtest. It is not uncommon for a price to revisit a previous level of support one more time from underneath, as a “farewell and good-bye.” This price action serves to confirm that a trend reversal is in play.
After the backtest was completed, CRM stock once again began to drift lower, as expected.
The following Salesforce.com stock chart illustrates the backtest—and the price action that followed it—in more depth.
Chart courtesy of StockCharts.com
There are two distinct factors on this Salesforce.com stock chart that are characterized as bearish.
The 200-day moving average is the dividing line between stocks trading in a bull market versus stocks trading in a bear market. When the share price is above the moving average, it is bullish; when the share price is below the moving average, it is bearish. CRM stock gapped below this moving average in September, and every attempt to close above it has been refuted. As long as Salesforce.com stock is trading below this level, my bias can only be bearish.
The pattern that the price has put in is known as a rounded top. This is a bearish pattern that is produced when investors begin to distribute shares to other unsuspecting retail investors. This process is slow and drawn out, because bull markets end slowly, as the greed that fueled it takes longer to subside. The pattern is almost complete, and the only hope for the bulls is that this pattern aborts by the price breaking above it.
There is a notable price gap at $67.50, and a close below this level would confirm that a top has been put in place. The competition of the rounded top and the closing of the gap would mark the beginning of the bear market, and a test of the 2016 low would be the next logical objective.
The Bottom Line on Salesforce.com Stock
I am bearish on Salesforce.com stock because the indicators I have produced on the price charts support this view. My bearish view will remain until the CRM stock chart gives me reason to question this bias.