Square Inc: SQ Stock is Setting Up to Surge

SQ Stock Breakout ImminentSQ Stock: Breakout Imminent

Square Inc (NYSE:SQ) produces devices that can turn your smartphone or tablet into a payment-processing point-of-sale unit. The company’s products are sleek and effective, and provide new businesses a quick and easy payment-processing solution.

Square Inc also offers a number of financial services to help manage the day-to-day functions of a small business in one streamlined marketplace. Its products and services are gaining acceptance and market share, and this can be seen as Square Inc has produced sequential quarter-over-quarter revenue growth.

SQ stock shareholders have not yet seen the fruits of their labor, but I believe that is all about to change.

I am bullish on Square stock, and my view has everything to with how I analyze stocks. I respect the fundamental backdrop for evaluating the foundation of an investment, but I have found technical analysis to be more suited for my needs, as it gives me more insight into the direction that an investment vehicle is headed. The SQ stock chart has piqued my interest, and I await a resolution to a chart pattern that will indicate the magnitude of the next price move.

The following price chart was the initial reason I decided to add Square stock to my watch list.


Chart courtesy of StockCharts.com

I added Square stock to my watch list because I have reason to believe that this investment bottomed this summer. There are three reasons why I believe that a bottom was put in, and all three reasons stem from trend reversal chart patterns.

The first pattern is the island bottom, and is perhaps the most important. This is the largest of the three trend-reversal patterns, and it consists of two price gaps: an exhaustion gap (gap down) and a breakaway gap (gap up) that occur at the same price level. This price level is $11.00, which is highlighted with a pink horizontal line.

This pattern creates a bullish tailwind because it effectively traps any short sellers who sold after the first gap down. These bearish positions need to be covered at some point so, as a result, buying support is created as these bearish positions need to be unwound.

The second reason was the head-and-shoulders bottom pattern. This pattern consists of three troughs and a neckline, in which 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. A trend reversal is confirmed when the price closes above the neckline. This pattern is small and embedded within the larger reversal patterns, but it serves to only reaffirm that a bottom was being put in, as the trend quickly turned higher after this pattern was executed.

The third reason is the rounded bottom, and the name of that pattern effectively describes the shape. The pattern describes the price action as it slowly turns and a bottom is gradually put in. These patterns are usually accompanied with low volume, as the last few remaining bulls throw in the towel and lose interest. This pattern was completed when SQ stock put in a price gap that effectively confirmed a trend reversal.

All three price patterns are embedded within one another and, together, they serve to suggest and confirm a bottom in price. The horizontal line produced by the island reversal is a major level of support, and buyers have been stepping in to support SQ stock at this price level.

The price action that followed this bottom is constructive and alludes to a possible price breakout.

The following Square stock chart illustrates the bullish setup pattern.


Chart courtesy of StockCharts.com

The price action illustrated on the SQ stock chart above is constructive because it is a bullish setup pattern. Bull markets consist of impulse waves that are followed by consolidation waves that give way to further impulse waves.

The chart above illustrates an impulse wave that occurred off of the bottom that was put in this summer that was then followed up by a consolidation wave. This consolidation wave is coming in the form of a pennant, and this pattern is on the verge of being complete. Pennants tend to break out when the pattern is 70% complete.

The rule of thumb is that the direction of the next impulse wave is similar to the prevailing impulse wave. Assuming this notion, and a bullish breakout, the target price of the next wave is approximately $15.00 on Square stock.

The Bottom Line on Square Stock

I am bullish on Square stock because the price chart has painted the compelling picture that a bottom was put in this past summer. The price is once again constructive, and my bullish views on SQ stock will remain as long as the stock is trading above $11.00 on a weekly closing basis.