Stock analysis

Palo Alto Networks Stock Could Rally Above $160

Palo Alto Networks, Inc. (PANW) shares traded sharply higher ahead of Friday’s opening bell after the company beat fiscal fourth quarter profit and revenue estimates while guiding 2018 earnings per share in line. The bullish earnings report marked the company’s second quarter of better-than-expected results after the stock slumped to a two-year low in April 2017, and this could signal the end of the broad correction that started after the July 2015 top.

The initial rally burst has mounted the trendline​ of lower highs in place for the past 25 months, setting off a powerful buying signal as long as the stock holds this lofty ground into the holiday weekend. In turn, that could set the stage for a recovery wave into the mid-$160s, where a line of horizontal swing highs could stall or end the uptick. That shines a bright spotlight on Friday’s price action. (See also: Palo Alto Underpins Cybersecurity Rally.)

PANW Weekly Chart (2012 – 2017)

This networking and communications company came public in the low $50s in July 2012 and entered a steady uptrend that topped out at $72.61 just two months later. The subsequent decline continued into June 2013, when it posted an all-time low at $39.08 and turned higher, lifting into resistance at $50, where aggressive sellers triggered a November retest that completed a double bottom reversal.

The stock then entered a powerful trend advance driven by momentum buying pressure, lifting to a new high in March 2014 and easing into a narrow rising channel that continued into the July 2015 top of $200.55. It sold off to $140 during the mini flash crash a few weeks later and rebounded into December, completing a double top that broke to the downside in February 2016. That plunge ended quickly at $111, setting a floor that was tested in June 2016 and April 2017. (For more, see: Palo Alto Networks: 2016 in Review.)

The horizontal floor and sequence of lower highs since 2015 carved a broad descending triangle pattern that has been threatening to dump the stock into a bear market decline. Fortunately for long-suffering bulls, that painful scenario can be taken off the table if committed bulls now prevail, completing a multi-year trendline breakout and filling the March gap with a rally wave above $150.

PANW Daily Chart (2015 – 2017)

Volatile two-sided action erupted after the July 2015 top, with massive swings in both directions testing the wills and pocketbooks of formerly complacent shareholders. The two-month 83-point decline into the February 2016 low damaged long-term bullish psychology, forcing many folks to incur major losses and hit the sidelines. The stock has traded in a 50-point horizontal range since that time, turning swing trading profits while long-term players get whipsawed into oblivion. (See also: Why Palo Alto Networks Stock Has Hit Rock Bottom.)

On-balance volume (OBV) highlights the bilateral forces at play in the past two years, with deep selling waves ending in dramatic buying surges that failed to reach lofty 2015 levels. Intense selling pressure into April 2017 may have ended that bearish pattern, giving way to a basing pattern followed by bottom fishing and fresh accumulation that should accelerate in the coming weeks.

The trendline breakout and March gap should guide September price action, as long as bulls hold new support through Labor Day. The rally into mid-July stalled at trendline resistance within five points of the gap fill at $148, with that high getting tested in pre-market action. The trendline at $140 should generate solid support in this endeavor, but the stock could whipsaw several times before bulls prevail with a buying surge into resistance at the 2016 swing highs in the mid-$160s. (For more, see: Palo Alto’s Quarter: A Breakdown of the Numbers.)

The Bottom Line

Palo Alto Networks has broken out above a two-year trendline following a well-received quarterly report. The stock needs to hold the $140 to $143 level to signal a breakout that could generate an additional 20 points of upside into the fourth quarter. (For related reading, check out: Cybersecurity Stocks for 2017.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>