Oppenheimer’s Ari Wald is right about Paypal Holdings (NASDAQ:PYPL). So is TradingAnalysis.com’s Todd Gordon. For that matter, I was also right about PayPal stock when I dissected its chart a week ago — PYPL stock is in the throes of an enticing breakout.
Granted, that doesn’t necessarily seem to be the case as of Wednesday, with shares a bit in the red. It’s also not the ideal breakout thrust; a gap was left behind a little over a week ago. If traders are picky, they may try to go back and fill it in before moving higher in a more permanent way.
If you take a step back and look at the bigger picture, however, it’s difficult to not like the bulls’ odds.
PYPL Stock Charts Tell the Story
It’s messy to look at, though not terribly complicated.
For the better part of 2018, PayPal stock was range-bound. That range started to narrow around the middle of last year, with the ceiling starting to fall while the floor continued to rise; that converging wedge shape is plotted by yellow, dashed lines on the weekly chart below. PYPL popped out of the confinement two weeks ago, and buyers haven’t looked back.
Shares of PayPal have also broken through horizontal resistance around $89, which Gordon believes is a significant clue that could let the stock march to the $100 area.
Zooming into the daily chart of PayPal stock serves up more detail on the matter, though it also exposes a potential flaw in the advance. That is, on Jan. 8, the rally left behind a gap. Broadly speaking, the market doesn’t like to leave behind price intervals on a chart (though it’s not a hard and fast rule). That gap is highlighted in blue.
Quietly bolstering the bullish argument is the convergence of all the key moving average lines just this week.
It’s difficult to quantify, but easy to qualify … periods of major net-movement are followed by periods of choppiness, and vice versa. One only has to glance at the weekly chart to see 2017 was a huge year, marked by a wide divergence of the major moving average lines. The bulk of last year was spent bringing them back together. From here, the tendency should start to separate those lines again, and so far that separation looks like it’s going to be driven by bullishness.
PayPal stock is going to need the market’s help to do that, most likely, but as long as the undertow doesn’t become overwhelmingly bearish, PYPL looks to be a good bet for 2019.
The Right Backdrop for PYPL
A couple of qualitative clues underscore the idea.
First, as Wald explained, “mobile payments company PayPal, breaking through multimonth resistance in a difficult market tape – we think that is telling,” adding “[t]hat’s the type of relative strength that we think you want to own.”
He’s right. It’s subtle, but it’s a clear hint traders hold PYPL stock in a slightly more bullish light than other names. This sort of elevated respect translates at least into a psychological floor most other stocks aren’t enjoying right now.
Oppenheimer’s Wald was also on to something when he pointed out “Our overall macro view [is] that a premium is going to continue to get placed on these high-growth companies in a low-growth world.”
That will have to be the case, in fact, with PayPal’s forward-looking price-to-earnings ratio of 31.7.
The evidence to support Wald’s thesis is in place, however. Rival Square (NYSE:SQ) has been recovering quite nicely since late December, and its trading at more than 90 times this year’s expected profits. Wald also noted salesforce.com (NYSE:CRM) was in breakout mode despite its frothy valuation.
Translation: Fundamentals and valuations aren’t really a factor here, particularly when an entire cluster of related or even just semi-related stocks are moving as a herd. That’s often an indication of a secular bull trend.
Bottom Line for PayPal Stock
Still, never say never. The gap from last week could weigh on investors’ minds, particularly if the rhetoric turns bearish again.
There’s also the distinct possibility the August/September peak around $93 could act as a ceiling now, preventing a move to the $100-ish area. Wednesday’s weakness could be a hint that traders aren’t even willing to test that potential resistance yet. It’s also worth noting that, while the rally has been impressive, it’s been a low-volume effort. A trend should gather participants as it proceeds, if it’s going to last.
Nevertheless, it’s a chart worth keeping tabs on. It has already done a great deal of heavy lifting, setting the stage for what could be a repeat of 2017. “Never say never” works both ways.
From here, getting past $93 is the next big step. Just know that’s going to be more of a process than an event.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
