If PayPal Is Forming an Island Reversal It Will Not Mean a Holiday Vacation
In his Real Money column "Let the Froth Wash Out," Jim Cramer talked about which stocks are safe to own and which might be risky in this current market environment. He pointed out the risks in some bank stocks and said that a safer stock would be PayPal Holdings Inc. (PYPL) , which had strong earnings and far less risk.
Let's check out the charts of this payment system company.
In the daily bar chart of PYPL, below, we can see that prices regained their lost ground in just four weeks from late March to late April. This month prices have made new highs and recently gapped to the upside. Prices have been holding in a tight trading range the past few days and the risk to me is if prices gap lower.
This kind of price action could be what old time traders like myself call an island reversal. Prices are above the rising 50-day and the rising 200-day moving average lines but they react to the price movement and do not lead it.
The On-Balance-Volume (OBV) line has been strong since early April but shows a recent peak. The Moving Average Convergence Divergence (MACD) oscillator has begun to narrow and tells us that PYPL is starting to lose some of its trend strength.
In this weekly bar chart of PYPL, below, we can see that prices have been strong the past three years. These indicators are all bullish at this point in time and they are not designed to be able to pick up a quick reversal pattern.
In this daily Point and Figure chart of PYPL, below, we can see that prices have reached and exceeded their price target of $136. An island reversal pattern would not show up on this kind of chart because gaps are not plotted.
In this weekly Point and Figure chart of PYPL, below, we can see a potential longer-term price target of $275.
Bottom-line strategy: PYPL may not form an island reversal and may just resume its rally in short order. We do not know for certain. What I do know is it possible so traders may want to be a little more defensive in the short-run.
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