Shares of cybersecurity company Palo Alto Networks Inc (NYSE:PANW) are higher by over 18% over the past week of trading, following their latest quarterly earnings report on May 31. This latest rally comes after a steep one-day drop just three months ago on March 1. Through the lens of technical analysis and investor psychology, this bullish reversal rally over the past week looks to have further upside — about 8%, to be exact.
One of my former mentors at JP Morgan used to remind me almost daily that “we can learn a lot (about the markets) by just watching.” What he meant is that by the way a stock, bond or currency reacts to news often times tells us when meaningful and likely sustainable rallies or sell-offs are about to take hold that we can profit from.
The other thing this statement implies is that patience is key. From an intermediate-term trading perspective waiting for an initial meaningful move in an asset to take hold and then pouncing on a trade has, over time, a significantly higher profitability rate than getting into trades in anticipation of news.
When I last discussed shares of Palo Alto Networks on May 16 I offered that “the breakaway rally that has taken hold in the stock thus far in May could be the start of something more promising.” Specifically I said that buying some PANW stock around the $120ish area made sense if it was paired with a put to partially protect the long position.
I said that a next upside price target could be around $135, which is the level the stock ultimately gapped higher to following the May 31 earnings report. So far, so good.
Looking at the multiyear weekly chart we see that despite the sharp rally over the past week, PANW stock has merely moved back to the upper end of its multiyear consolidation wedge as marked by the black parallels. From a momentum perspective as represented by the MACD oscillator at the bottom of the chart, we see that much more upside may still be in the cards. To be clear, momentum alone is no catalyst to buy or sell a stock, but it does allow for some context.
On the daily chart we see that the down-gap in March followed by the up-gap on June 1 left a clear so-called “island reversal” behind. This reversal pattern is bullish by nature as it left the price action from March 2 to May 31 rejected and alone. Such reversals are an important technical signal that can lead to high-probability setups, and for those unfamiliar, I’ll be hosting a special webinar June 15 for InvestorPlace readers to explain these signals and how to turn them into winning trades.
On this chart, we also see that there is an unfilled gap left above the current price, which I marked with the upper blue box and which fills around the $152 area. In other words, after possibly some more consolidation of last week’s rally, PANW stock could gravitate toward $152 as a next upside price target. A break and hold above $141 could set in motion a squeeze higher toward $152, while any bearish reversal should be respected as a stop-loss signal.
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