Splunk Surges Following Earnings, and Further Gains Expected to Follow

 Splunk stock
Credit: iStock.com/phongphan5922

SPLK Stock: Patience Has Its Virtues

I have been following Splunk Inc (NASDAQ: SPLK) stock since November 2016 and I was actually growing weary that perhaps the move towards higher SPLK prices I was anticipating was not going to occur.

This all changed on November 17, 2017, when Splunk stock surged following a better-than-expected earnings report where it not only beat on both the top and bottom lines but also guided earnings higher for the coming quarters. This abundance of great news is the reason why SPLK stock is currently trading higher by 15.03% on the day.

I am actually ecstatic with the news and the reaction that followed because the pattern that I originally outlined on April 24, 2017, in a publication titled “Splunk Stock Is on the Verge of a Technical Breakout,” is now complete and is suggesting that much higher SPLK stock prices are on the horizon.

The Completed Technical Price Pattern

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

Splunk stock chart

Chart courtesy of StockCharts.com

This SPLK stock chart illustrates the cup and handle price pattern that was just completed following the earnings reaction.

This pattern contains two distinct troughs, where the first is much larger than the second. These troughs developed due to a significant level of price resistance that prevented the stock price from advancing.

The first time this level was established, investors were eager to sell, and as a result, a violent sell-off followed. The subsequent attempts at this level resulted in subdued selling pressure as investors were less inclined to sell. This sentiment from the investment community causes the first trough to be much larger than the second, and it also sets up the possibility that the significant level of resistance will be broken on the next attempt.

This level of resistance at $70.00 was finally broken following the better-than-expected earnings announcement. This event is highlighted on the SPLK stock chart as a breakout, and it suggests that much higher stock prices are in development. Completed cup and handle price patterns, aside from just suggesting that higher prices are in development, can also be used to create a possible upside price objective.

This objective is obtained by taking the depth of the cup and projecting that value above the level of resistance that defined the pattern. Applying this logic to the completed pattern on the Splunk stock chart produces a potential price objective of $110.00.

Wait, There Is More…

Taking a longer-term view of the price action reinforces the implication of the bullish event that has just occurred.

The following stock chart illustrates the constructive price action that justifies the notion that higher SPLK stock prices are in development.

SPLK price chart

Chart courtesy of StockCharts.com

This Splunk stock chart has been annotated in order to highlight the constructive price action that has been in development. Constructive price action consists of impulse waves and consolidation waves that work in an alternating fashion to create and sustain a trend.

The impulse waves, highlighted in green, mark the point in a bullish trend where the stock price stages a sustained move towards higher prices.

The consolidation waves, highlighted in purple, mark the point in a bullish trend where the stock price refrains from making an advance. The function of this wave is to create the necessary conditions so a new impulse wave can develop.

The surge in price following earnings not only completed the cup and handle price pattern, but it also completed the consolidation wave, suggesting that a new advancing impulse wave is now in development.

The notion of an impulse wave in development is being supported by the moving average convergence/divergence (MACD) momentum indicator located in the lower panel.

MACD uses the crossing of a signal line to determine whether bullish or bearish momentum is influencing the price action in a stock. This indication is very influential and significant because, in order for Splunk to stage a move towards higher prices, bullish momentum is required.

In February 2017, a bullish MACD cross was generated, indicating that bullish momentum was influencing the trading action in Splunk stock and suggesting that the path of least resistance was geared towards higher stock prices. It was this indication that first suggested that a move towards higher prices was in development. I have been watching SPLK stock ever since, waiting for a such a move to show its face.

The target price suggested by the cup and handle pattern is near the all-time high that was set in early 2014, and I am looking for this level to be tested in the not-too-distant future.

Analyst Take: 

I hold a bullish view on Splunk stock because a number of technical indications on the SPLK stock chart are suggesting that higher prices are on the horizon. This view was based on the indication generated on the company’s stock chart, and I will therefore maintain my bullish views until there are indications suggesting that another view is warranted.