AAOI Stock Is Forging New Highs
I have been focusing on a number of stocks lately, and they all have a similar price pattern on their stock charts. This price pattern is particularly powerful, and some of the best-performing stocks year-to-date have begun their runs on such an exact price pattern.
Applied Optoelectronics Inc (NASDAQ:AAOI) stock is a having an exceptional 2017 so far, up 200.59% year-to-date. I am attributing this fruitful level of price performance to the price pattern on the AAOI stock chart that initiated this move, and which is now propelling this advance.
Before I move forward, I always find it wise to clarify that I generate my views on a potential investment by analyzing the company’s stock chart. This style of investment analysis is known as technical analysis and, when it comes to generating investment strategies, I have found nothing that provides as much value as this method of analysis. The indications generated by using this method are based on price and volume and, therefore, these indications give signals that are quite timely, which is a key ingredient in disciplined trading strategy.
The particular price pattern I am focusing on is centered around when a company’s stock price returns to break above a previous all-time high that was set shortly after the company began trading publicly. This particular price pattern is illustrated on the Applied Optoelectronics stock chart below.
Chart courtesy of StockCharts.com
The AAOI stock chart above illustrates that shortly after the company began trading publicly, the share price peaked in March at a high of $28.01. After this level was attained, the shares proceeded to sell off until a low was finally made in January 2015. The stock price bounced around in range from that point on, and this low at the $8.00 mark was tested once again in May 2016.
This second test of the low created the necessary conditions to assume that a double-bottom pattern was being painted on the AAOI stock chart. This pattern is confirmed when the stock price crosses above the peak that’s between the two bottoms. A completed double-bottom pattern indicates that a trend reversal is in play, and that higher prices are likely to follow. In November 2016, Applied Optoelectronics stock broke above the peak that separated the two bottoms, indicating that a bottom in the stock was in, and that a new bullish trend has begun.
This bottom was the precursor to breaking above the previous all-time high. New all-time highs returning to break above a peak (which was generated shortly after the investment began trading publicly) creates an environment where the stock price tends to experience a tremendous amount of acceleration in a short time.
There is a justifiable reason for this acceleration in the share price, so let me explain.
When a stock makes a new all-time high, anyone who has ever purchased a share of AAOI stock is holding a position that is in profit territory, so that leaves little inclination to sell. At the same time, anyone holding a bearish short position is underwater on their investment. This creates an environment where these bearish investors need to cover their short positions, because a short position carries unlimited loss liability.
This creates a vacuum of demand as new entrants are chasing bullish momentum and short sellers are covering their positions. The flow of demand outstrips all available supply as investors are content with holding onto their positions and, as a result, this causes the stock price to rise very quickly.
When AAOI stock broke above the previous all-time high in January of this year, this opened up the door to much higher stock prices. This did not disappoin, because, year-to-date, AAOI shares are up 200.59%.
This is the exact scenario that struck Facebook Inc (NASDAQ:FB) stock. The following FB price chart illustrates an almost-identical price pattern.
Chart courtesy of StockCharts.com
The above Facebook price chart is very similar to the Applied Optoelectronics stock chart, and it is easy to see the similarities between the two charts.
Once the previous all-time high—which was set shortly after Facebook stock began trading—was finally breached, an epic run to the upside ensued. Like AAOI stock, Facebook sold off after its initial public offering (IPO) and created a new low. It took a little more than a year for Facebook stock to breach this level, and it hasn’t looked back since.
The acceleration witnessed on this price chart is awe-inspiring. I have seen many such price patterns in recent years, and it is quickly becoming my favorite because its success rate and performance is quite outstanding.
Bottom Line on Applied Optoelectronics
Applied Optoelectronics stock completed a powerful price pattern in January of this year, and the bullish implications generated from this pattern continue to drive the share price higher. As long as this investment continues to make higher highs and higher lows, I have no choice but to hold a bullish view on AAOI stock.