SQ Stock and the Power of Four
I have been following Square Inc (NYSE:SQ) stock since summer of last year, and I have been keeping on top of the bullish run that has developed since then. This bullish run has seen Square stock more than double, and has been quite a spectacle to watch.
This advance has been quite orderly, and SQ stock has developed a distinct characteristic in its trading action. It’s a characteristic that can be exploited in order to create an applicable trading strategy.
My bullish views on Square stock have been generated using technical analysis. This method of investment analysis is based on the notion that historical price and volume data can be used to discern a stock’s trend and forecast future prices. I have been refining my skills in this method for nearly two decades, and I have become proficient in analyzing a company’s stock chart.
I became bullish on SQ stock on August 18, 2016, after a close examination of the Square price chart suggested that a bottom in the stock had been formed. I have been outlining key technical developments during this bull market that have been reinforcing the notion of higher prices. These key technical patterns have developed a defining characteristic that has become a recurring theme.
The following Square stock chart illustrates the characteristic that has defined the bullish advance in SQ shares.
Chart courtesy of StockCharts.com
The defining characteristic is embedded within the bullish constructive price action, which consists of a two-wave structure.
The first wave is an impulse wave, and the objective of this wave is to advance the price in a linear motion. This wave is highlighted in green on the price chart above.
The second wave is a consolidation wave. The objective of this wave is to unwind any overbought conditions that were created during the previous advance, and to set up the next advancing impulse wave. This wave is highlighted in purple on the price chart above.
The defining characteristic that continues to stand out is that, whenever a consolidation wave is completed, an impulse wave develops that is $4.00 in length. There have been three such impulse waves that have developed since the summer of last year, and all of them have been $4.00 in length.
This characteristic can be exploited to create an investment strategy because I can only assume that, after the consolidation wave that is currently in development finally completes, an impulse wave will develop that will yield to another run higher that is $4.00 in length. From current levels, it suggests that SQ stock would reach the mid-$20.00 level before the impulse wave has concluded.
This bullish view is contingent on a bullish resolution of the consolidation wave that is currently in development. A bullish resolution requires the price to exit the consolidation wave in an upward direction. This feat would also coincide with the price of Square shares remaining above a key trend line that has supported this advance since the bullish run began in the summer of last year.
This key trend line is illustrated on the following SQ stock chart.
Chart courtesy of StockCharts.com
The Square price chart above contains a trend that consists of higher highs and higher lows. This price action is the quintessential characteristic that defines a bullish trend, which is easily defined using a simple uptrend line. This uptrend line is created by connecting the troughs on the price chart.
Using this trend line as a tool is as easy as it was to create. Trading above the trend line is a bullish indicator, and I can only assume that higher prices will prevail. Trading below the trend line is a bearish indicator, and I could only assume that lower stock prices were set to prevail.
The advance that began in the summer of last year was effectively confirmed by the moving average convergence/divergence (MACD) indicator, located in the lower panel of the above stock chart. MACD is a simple and effective trend-following momentum indicator that uses signal-line crossings to distinguish between bullish and bearish momentum.
In August 2016, a bullish cross was generated, which served to suggest that bullish momentum was propelling Square stock and, as a result, the path of least resistance was geared toward higher prices. This indicator has remained in bullish alignment while Square stock has continued to trade above the uptrend line.
Support outlined by the uptrend line currently sits at $16.00 and, if I were to develop a trading strategy, I would use this level to define my risk. This level also coincides with support outlined by the consolidation wave that is currently in development. This confluence of support at one price level suggests that support is both strong and significant.
Bottom Line on Square Inc
I am bullish on Square stock because the indications on the price chart continue to support an advance. My bullish view is predicated on SQ stock remaining above the $16.00 level outlined by the uptrend line. Remaining above this level suggests that another impulse wave will develop that is projected to hit the mid-$20.00 level, which is based on the length of the previous impulse waves.