Yelp Stock: Breaking Out!
Friday August 4, 2017, was a marvelous day for Yelp Inc (NYSE:YELP) stock as it closed the day at $40.05, which was a staggering 27.67% higher than the previous day’s close. The reason why Yelp stock surged by this amount was due to its stellar earnings report, where the company posted top and bottom line numbers that blew past everyone’s expectations.
The news kept getting better, and during the earnings call, the company announced that it sold Eat24 to GrubHub Inc (NYSE:GRUB) at a significant profit. And if that was not enough, the company went on to announce a buyback program, where it plans to repurchase $200.0 million worth of common stock.
The magnitude of the surge that followed this earnings report serves to suggest that this investment community was not ready for such a bullish report. Up 27.67% in a single day happens when investors are caught wrong-footed and need to quickly adjust. I am particularly pleased with what has occurred because it has created a dynamic shift in the overall picture that was being painted on the company’s stock chart. The surge in the yelp stock price has broken above a very significant level of price resistance, which is now suggesting that a new bull market is now in development.
For anyone who hasn’t frequented any of my previous publications, it is worthwhile to note that my views on this stock have been generated using technical analysis. This method of investment analysis is based on using historical price and volume data, which is found on a stock chart, to forecast what the future may bring. I have spent nearly two decades refining my skills in this craft, and when it comes to generating an investment strategy, I have yet to find anything as systematic and compelling as this method.
The following Yelp stock chart illustrates the effect that the surge in price had on the company’s chart.
Chart courtesy of StockCharts.com
That massive move in Yelp’s stock price has broken a downtrend line that has been in development since February 2014. This downtrend line, which was created by connecting the significant peaks on the chart, served to define a bear market that decimated this company’s share price, where the company lost 85.72% of its value from peak to trough.
This simple downtrend line acted as a level of price resistance that contained the price of this investment from advancing. Breaking above it suggests that the bear market that decimated the share price has finally run its course, and therefore, a new bull market is now in development.
The fact that this downtrend line was broken on a day when the yelp stock price appreciated by 27.67% only reinforces this new bullish view. Breaking this downtrend line was no easy feat, so given that it occurred with such fireworks only serves to vindicate the bullish view suggested by it.
The break of the downtrend line was not the first indication to suggest that a bull market was in development. The moving average convergence/divergence (MACD) indicator located in the lower panel was suggesting that a bull market was in development since July 2016.
MACD is a momentum indicator that is used to distinguish between bullish and bearish momentum which is required to stage both an advance and a decline. As a result, the MACD indicator is instrumental in suggesting whether an investment is geared towards higher or lower prices.
The MACD indicator remained in bearish alignment up until July 2016. While it was in bearish alignment, it was suggesting that bearish momentum was influencing the price and therefore, the stock was geared towards lower prices. During that time frame, the stock price was decimated by a bear market.
Now that a bullish MACD cross was generated in July 2016, all the bearish implications suggested by the previous signal are a thing of the past. The bullish MACD cross suggests that bullish momentum is influencing this investment, and higher stock prices can now be expected to follow because Yelp stock is geared towards higher prices.
The break above the downtrend line serves to confirm the bullish implications suggested by the MACD indicator. As a result, a new bull market in Yelp stock is now in development, and I will be on the lookout for constructive price action, which will be supportive of a move to the upside.
Bottom Line on Yelp Stock
Yelp stock exploded to the upside on Friday, August 4, 2017, and in the process a significant level of resistance, outlined by a downtrend line, was broken to the upside. This event marks the point where a new bull market was confirmed, and therefore, higher stock prices are likely to follow.