The Surge in YY Stock Was Already Implied by These Indications

YY stock
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YY Stock: The Exceptional Performance Was Anticipated

YY Inc (ADR) (NASDAQ:YY) reported earnings after the close of trading on November 14, and it knocked the socks off investors’ expectations by beating both on the top and bottom lines. As a result, this Chinese social media company is currently trading much higher on this news. YY stock is currently at around $111.39, which also happens to be a new all-time high.

This is not my first foray into this name. I originally focused on
YY stock on July 19, 2017, in a report titled “YY Stock Has its Sights Set on Much Higher Stock Prices.” In that report, I outlined the technical developments suggesting that moves toward higher stock prices were in development.

I took things one step further in that report and suggested that these developments were implying that the previous all-time high, which stood at $96.39, was set to be tested. This level was tested on October 16, and this surge in price following earnings has breached it.

To put things into perspective, I outlined these developments in July, when YY shares were trading at $67.06. That means, in the span of four months, this investment has appreciated to the tune of 61.2%. This incredible return is a testament to the value that technical indications can provide when they are applied correctly.

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The technical developments responsible for generating my bullish view on YY stock are highlighted on the following stock chart.

YY stock chart

Chart courtesy of StockCharts.com

YY stock is the perfect example of constructive bullish price action and its repercussions.

Constructive price action consists of two distinct waves that work together in order to create and sustain a trend.

The wave that is highlighted in green is an impulse wave, and it defines the stage in a bullish trend when the stock price makes a move toward higher prices. The impulse wave captures all gains that are produced in a bullish trend, and its development will continue until the underlying metrics become stretched and no longer support a move toward higher prices.

The wave that is highlighted in purple is a consolidation wave, and it defines the stage in a bullish trend when the stock price refrains from advancing and a correction ensues. Price corrections are necessary to alleviate any overbought conditions that were created during the preceding impulse wave.

This creates the necessary conditions required for a new advancing impulse wave to develop. In essence, the consolidation wave ensures that the trend remains healthy. A healthy trend is a sustainable one.

In a bullish trend, these waves feed off each other. Therefore, a sustained move toward higher prices cannot exist without these waves creating the building blocks to support it.

In July, I pointed out that, since the consolidation wave was complete and a new impulse wave was in development, it implied that higher YY stock prices were in development.

The momentum indicator, located in the lower panel, reinforced the bullish implications suggested by the newly created impulse wave. This momentum indicator is called MACD, which is an acronym for moving average convergence/divergence indicator.

MACD uses the crossing of a signal line to determine whether bullish or bearish momentum is influencing the trading action in a stock. This indication is extremely influential because, in order to sustain a move toward higher or lower prices, the applicable momentum is required.

In June 2017, a bullish MACD cross was generated, which indicated that bullish momentum was influencing the trading action in YY shares, implying that the path of least resistance was geared toward higher prices. Almost instantly after this indication was generated, the share price exited the consolidation wave and a new impulse wave began its development.

Since these technical indications suggested that higher prices were in development, there have been five months of consecutive gains and a new all-time has just been forged.

The previous all-time high was set in 2014, and breaking above this long-standing level of resistance suggests that further gains are on the horizon. New all-time highs create a bullish environment because there is no overhead resistance to contain the price from advancing. Add the notion that short sellers are now inclined to cover while momentum investors are chasing performance, and the perfect ingredients have been created to cause an acceleration of the trend toward higher prices.

Analyst Take: 

I have been bullish on YY stock since July 2017, when I outlined the technical developments suggesting that a move toward higher prices was in development. Since that date, the price has appreciated to the tune of 61.2%. The new all-time high that was just forged suggests that further gains can be expected.