Z Stock: Higher Stock Prices Are Likely
On January 29, 2018, the dynamics of the markets changed in a considerable way. A characteristic that was absent for all of 2017 showed its face, making a grand entrance as the markets were finally able to string together consecutive down days when a violent correction gripped the indices. Since that day, volatility has remained high and large market swings have become the norm.
An elevated level of volatility can be stressful, but I continue to believe that the sell-off that has just taken place was a much-needed correction and that once it has run its course, higher index values will once again prevail. As a result of my bullish bias, I continue to focus on compelling investments that contain certain technical characteristics I believe are suggestive of higher stock prices.
One such investment is Zillow Group Inc (NASDAQ:Z) stock. Zillow is a very interesting stock because the price action on the Z stock chart has been alluding to a bullish outcome for quite some time but the move toward higher Z stock prices has been slow and methodical.
In order to help visualize what I am talking about, I have provided the following Zillow stock chart.
Chart courtesy of StockCharts.com
This price chart has been annotated in order to highlight the price action that has been responsible for creating constructive price action.
Constructive price action consists of impulse waves and consolidation waves, which work together in an alternating wave structure to create and sustain a bullish trend.
The waves highlighted in green are impulse waves, and these waves are advancing in nature. They define the stage in a bullish trend where the stock price makes a sustained move toward higher prices.
The waves highlighted in purple are consolidation waves, and these waves are corrective in nature. They define the stage in a bullish trend where the stock price corrects and refrains from advancing. This corrective price action is responsible for unwinding overbought conditions and creating the necessary environment so an impulse wave can follow.
The bullish trend began in April 2016 with the development of an impulse wave. The impulse wave was followed by the development of a consolidation wave. This consolidation wave was in development for nine months until April 2017, when another impulse wave followed. Z stock finally peaked in June 2017 after reaching a high of $51.23.
The price action that followed this peak is why I referred to Zillow stock as slow and methodical; the correction that followed returned to test the level of resistance that defined the consolidation wave.
Returning to test a previous level of resistance is called a backtest, and it functions to reaffirm that the initial break above resistance was legitimate, while simultaneously establishing this price point as a new level of price support. Successful backtests act like springboards, and once they are complete, much higher stock prices usually follow.
The progression of these waves has coincided with a very significant and influential momentum indicator, which is highlighted on the following Zillow stock chart.
Chart courtesy of StockCharts.com
This Z stock chart illustrates that the development and progression of each wave has coincided with the moving average convergence/divergence (MACD) indicator.
MACD is a very significant and influential momentum indicator that uses the crossing of a signal line to determine whether bullish or bearish momentum is influencing the price action in a stock. Bullish momentum creates a path of least resistance geared toward higher prices, while bearish momentum creates a path of least resistance geared toward lower prices. The reason why this indicator is both significant and influential is because a stock cannot sustain a move in either direction unless the applicable momentum is supporting it.
This Zillow stock chart clearly shows that every sustained advance coincided with a bullish MACD cross, while each correction coincided with a bearish MACD cross. In essence, this illustrates that in a bullish trend, a bullish MACD cross coincides with the development of an impulse wave, while a bearish MACD cross coincides with the development of a consolidation wave.
The MACD indicator is currently in bullish alignment, reinforcing the notion that an impulse wave is currently in development. The Z stock price is approaching its previous all-time high, and a break above this level will open the door to much higher prices because there will not be any overhead resistance to contain the stock price from advancing.
I am bullish on Zillow stock because there are technical characteristics on the company’s stock chart that support the notion that higher Z stock prices are in development. As long as these technical characteristics remain in bullish alignment, I will maintain my bullish view on this investment.