Square Inc (NYSE:SQ) stock is a beautiful example of technical analysis at its finest.
The patterns that have developed are picture-perfect. When I refer to chart in this light, it should not be ignored. The reasoning behind this is simple; if the patterns are easy to see, and are painted perfectly on the chart, then everyone who looks at the SQ chart will see the exact same setup.
If everyone can see the same setup, then those using technical analyses for their trading strategy will all be on the same side of the trade. If everyone is trading.
The few stocks that are painted perfectly are great to trade for this reason. I will start with the lows in February and progress forward in explaining what the charts are currently signalling.
On April 19, 2016, Square stock broke the uptrend that served as support. Shares briefly dipped lower before shares rallied once again to back-test the trend line. Back-testing trend lines are common occurrences in charting. I consider the action as a kiss goodbye as price returns one last time to touch the trend before the reversal takes effect.
After the back-test shares dropped 40%, SQ stock gapped lower right after shares confirmed a lower low. The break from the trend and the back-test were signals to step aside.
The second embedded pattern is small “head and shoulders” pattern. The head and shoulders pattern consists of three troughs and a neckline. The middle trough—the head—is the largest, and first and third troughs—the shoulders—are usually of equal size. The “neck line” is formed by connecting the reaction highs. The setup is confirmed when price closes above the neckline, and a reversal is at hand. The price objective of this pattern was $10.50, and it was attained the day prior to the gap.