SQ Stock: Standing Aside
I have been bullish on Square Inc (NYSE:SQ) stock since August 2016, when I first featured this company. At the time of that first report, Square stock was trading at $11.75, and I outlined the positive developments that suggested a bullish view was warranted.
In November, I reiterated my bullish view because further developments on the SQ stock chart suggested that higher prices could be expected. I went on to explain in that report that a potential bullish pattern was setting up, and that the successful completion of this pattern suggested a potential price objective of $15.00. At the time of that report, Square stock was trading at $11.14.
Later in that same month, I released another report highlighting Square stock because the potential bullish pattern that I was watching had finally resolved itself in a bullish manner. This put the potential price objective of SQ stock at $15.00 into play. At the time of that report, SQ stock was trading at $12.45
As of January 10, 2017, that potential price objective of $15.00 suggested by the SQ stock chart was finally obtained and, as a result, I must stay true to the rules that I lay out. This rule entails that once a potential price objective is met, it is time to exit any open positions.
From an emotional standpoint, this is difficult to grasp, because who is to say that Square stock cannot continue trending higher? The rule also goes against the teachings of letting your winners run. From another standpoint, I laid out rules for a reason. The reason was to manage my risk and remove my emotions from my trading strategies.
Before I enter a trade, I outline the price points at which I would exit the trade. The key here is to be disciplined and adhere to the rules that I set out. This applies to both taking losses and taking profits. Discipline is the cornerstone of trading strategies and, without discipline, rules are not obeyed and strategies become meaningless.
The following Square stock chart illustrated how the $15.00 price objective was generated.
Chart courtesy of StockCharts.com
The price objective of $15.00 was based on the price action that began shortly after SQ bottomed in June 2016.
The SQ stock chart above is a perfect example of healthy bullish price action. Healthy price action consists of impulse waves that advance the price of the stock, and consolidation waves, where overbought conditions are alleviated and the setup for the next impulse wave is created.
The consolidation wave is so instrumental to my trading strategies that this is the wave I specifically look for when scanning for potential investments. The reason for this is based on the theory behind impulse waves that are separated by consolidation waves.
The theory states that the consolidation wave acts as a midpoint between two impulse waves. When a consolidation wave is complete, the subsequent impulse wave should mirror the initial impulse wave.
Applying this theory to Square stock; the first impulse wave was $4.00 in duration, therefore I can expect a similar impulse to follow once the consolidation wave is complete. This methodology created the $15.00 price objective, and is illustrated above.
My level of risk is also defined by the consolidation pattern. Once a price exits a consolidation pattern, it should not trade back below it. As a result, I would have set a stop loss at just under $11.00
Bottom Line on SQ Stock
Square stock has hit the price objective of $15.00 that was suggested by the SQ stock chart. This objective generated a return of 27.65% over a five-month period. The result of hitting the price objective is simple: I must stay true to my strategy and stand aside from my bullish view. If a new consolidation pattern presents itself, then perhaps holding a bullish view on Square stock will once again be warranted.