Square Inc: SQ Stock is Sending a Flashing Buy Signal

SQ StockSQ stock: A Triple Buy

Square Inc (NYSE:SQ) stock is a beautiful example of technical analysis at its finest.

The patterns that have developed are picture-perfect. When I refer to chart in this light, it should not be ignored. The reasoning behind this is simple; if the patterns are easy to see, and are painted perfectly on the chart, then everyone who looks at the SQ chart will see the exact same setup.

If everyone can see the same setup, then those using technical analyses for their trading strategy will all be on the same side of the trade. If everyone is trading with a bullish bias, then Square stock will trade higher and it becomes a self-fulfilling prophecy.

The few stocks that are painted perfectly are great to trade for this reason. I will start with the lows in February and progress forward in explaining what the charts are currently signalling.

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The chart below illustrates the uptrend that dominated trade in Square stock. An uptrend line, highlighted in blue, is created by connecting the troughs. An uptrend is defined by a progressive series of higher highs and higher lows. The trend moves from the lower left side of the chart to the upper right. There should be no mistaking an uptrend from a downtrend.

Square Inc NYSE Chart

Chart courtesy of StockCharts.com

On April 19, 2016, Square stock broke the uptrend that served as support. Shares briefly dipped lower before shares rallied once again to backtest the trend line. Backtesting trend lines are common occurrences in charting. I consider the action as a kiss goodbye as the price returns one last time to touch the trend before the reversal takes effect.

After the backtest shares dropped 40%, SQ stock gapped lower right after shares confirmed a lower low. The break from the trend and the back-test were signals to step aside.

The following chart illustrates the multiple embedded signals that have followed.

Square Inc NYSE INDX

Chart courtesy of StockCharts.com

The first embedded pattern is an “island reversal.” An island reversal is a pattern that consists of two gaps, an “exhaustion gap” (gap down) and a “breakaway gap” (gap up) that occur at the same price level. The island is created as the price action between the gaps is isolated. In a bullish reversal formation, the pattern is significant because all of the short sellers who initiated positions after the initial gap down are trapped. Or, as the pattern suggests, they are trapped and isolated on an island.

The line that represents the island is $10.89. Shares gapped down on May 6, 2016 and opened trading at this price point; all trading following this gap was below $10.89. If anyone initiated a short position, it was below this price. On August 4, 2016, SQ stock gapped up over that level of resistance. This meant that any new short positions in SQ stock were now all underwater, and needed to be covered at some point. Losses amounting from shorting a stock are unlimited, as there is no limit to how high SQ stock can trade. This creates a bullish tailwind.

READ MORE: “Square Inc: Are Triple Gains Ahead For SQ Stock?

The second embedded pattern is small “head and shoulders” pattern. The head and shoulders pattern consists of three troughs and a neckline. The middle trough—the head—is the largest, and first and third troughs—the shoulders—are usually of equal size. The “neck line” is formed by connecting the reaction highs. The setup is confirmed when price closes above the neckline, and a reversal is at hand. The price objective of this pattern was $10.50, and it was attained the day prior to the gap.

The third embedded pattern is a “double bottom.” A double bottom is a reversal pattern that appears at the end of trend. It is marked by two consecutive bottoms, separated by a peak in between. The pattern is confirmed when shares close above the peak that separates the two bottoms. This reversal pattern projects a price objective of $12.00, and it was attained on the day that SQ stock gapped higher.

One pattern fed into the other until ultimately, an island reversal was formed. This is bullish action feeding on itself.

The Bottom Line on Square Stock

The SQ stock chart is piece of artwork, with many embedded patterns confirming the trend. Currently, Square stock is sitting with a bullish bias that was confirmed by three different patterns. Traders refer to this is a “triple-buy” signal. I would not be surprised to see SQ stock testing the all-time highs in the not-too-distant future. It is worthy to note that if shares fell below $10.89 and filled the gap, I would have reason to be concerned about the current trend.