WDAY Stock: This Is Why Backtests Are an Optimal Time to Enter a Position
They say the most difficult part of investing is trying to time the markets. From an investor’s standpoint, we always want to pay the least when acquiring a position in a stock and receive the most when exiting a position. Both of these propositions are nearly impossible to capture on a consistent basis.
For argument’s sake, I am going to entertain the idea that entering into a stock at an optimal price is not only possible, but quite achievable on a consistent basis. In order to illustrate this possibility, I’m going to pull out a concept known as a backtest from my bag of technical tricks.
“Backtest” is a term used to describe price action when a stock returns to test a significant level of price resistance after it has broken above it.
I believe that a backtest from a breakout is the most opportune time to enter an investment because it offers a lower-risk entry point to a stock, where the level of said risk is clearly defined.
In order to illustrate what a backtest looks like, and to outline its implications, I am focusing on financial software company Workday Inc (NASDAQ:WDAY).
This chart for WDAY stock illustrates the concept of a backtest:
Chart courtesy of StockCharts.com
As illustrated above, a significant level of price resistance resided at $117.00. This level was first established in February 2014, and it stood as the all-time high for the next four years.
Then, in January 2018, Workday stock finally broke above that price resistance level. This was a bullish event, marked as a breakout on the chart above. This event indicated that there was no longer a level of price resistance to contain the stock. Therefore, the price was free to appreciate.
Buying the breakout may have seemed like the most logical plan of attack in pursuing this bullish event, but not in this case.
On June 27–28, WDAY stock returned to test the previous all-time high from above. This price action, which defines a backtest, served to reaffirm that the original break above resistance was legitimate, while simultaneously establishing this price point as a new level of support.
This backtest proved to be an optimal time to get into Workday stock because it marked a low. Since then, higher prices have prevailed.
Going forward, the previous all-time high acts as a stop-loss level. If the stock ever closes below this price point, it would be reason to suspect that the bull market in the stock is no longer in development.
Backtests are quite constructive, and during bullish trends, this type of price action occurs quite often. This is why the example I just outlined was not the only time WDAY stock has backtested a metric that acted as a significant level of resistance.
In fact, a backtest occurred as recently as September 24, as highlighted in the chart below:
Chart courtesy of StockCharts.com
The September 2018 backtest occurred after a technical price pattern known as a “descending channel” was completed.
This pattern captures a bearish trend consisting of a series of lower lows and lower highs. Connecting the peaks and troughs created by this bearish action produces two downward-sloping trend lines that identify significant levels of price support and resistance.
On August 15, WDAY stock broke out of the descending channel by breaking above the trend line that represented price resistance. This event, which is marked as a breakout on the chart above, negated the bearish implications suggested by the pattern. This, in turn, implied that a move toward higher prices was likely to follow.
And sure enough, higher stock prices did follow.
However, after a very impressive 12.9% move higher, the prices began to correct. On September 24, the stock price had gone full circle, and resistance outlined by the descending channel was being tested from above. This backtest proved to be another optimal entry point into Workday stock, as higher prices have once again prevailed.
These backtests are very constructive, and they have become a staple in this well-defined bullish trend, which is still in development.
The price action on the Workday stock chart continues to suggest that WDAY stock is primed for further gains.
The backtests of previous levels of price resistance are proving to be the most opportune time to add or initiate a position in Workday Inc, especially for those looking to mitigate risk.