PayPal Holdings Inc. (NASDAQ:PYPL) was surging over 11% on Wednesday after a report indicated Paul Singer's Elliott Management Corp. has taken a stake in the company.
The stock may also have reacted positively to a bull flag pattern that was developed between July 13 and Tuesday.
The bull flag pattern is created with a sharp rise higher forming the pole, which is then followed by a consolidation pattern that brings the stock lower between a channel with parallel lines or into a tightening triangle pattern.
- For bearish traders, the "trend is your friend" (until it's not) and the stock may continue downwards within the following channel for a short period of time. Aggressive traders may decide to short the stock at the upper trendline and exit the trade at the lower trendline.
- Bullish traders will want to watch for a break up from the upper descending trendline of the flag formation, on high volume, for an entry. When a stock breaks up from a bull flag pattern, the measured move higher is equal to the length of the pole and should be added to the lowest price within the flag.
A bull flag is negated when a stock closes a trading day below the lower trendline of the flag pattern or if the flag falls more than 50% down the length of the pole.
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The PayPal Chart: PayPal completed its bull flag on Tuesday. The sharp increase on Wednesday confirmed the stock is trading in an uptrend pattern on the daily chart as well. The most recent confirmed higher low was printed on Tuesday at $76.71, and the most recent confirmed higher high was formed at the $84.51 mark on July 22.
- The bull flag and subsequent uptrend was a likely scenario because between June 13 and July 13, PayPal had developed bullish divergence on its chart. A bullish divergence occurs when a stock makes a series of lower lows but its relative strength index (RSI) makes a series of higher lows. A rising RSI indicates bullish momentum is increasing.
- If PayPal closes the trading day near its high-of-day price, the stock will print a bullish hammer candlestick. This could indicate higher prices will come again on Thursday. The second most likely scenario is that PayPal will print an inside bar pattern to consolidate Wednesday’s increase, which would lean bullish for Friday’s price action.
- Eventually, PayPal will need to trade sideways or lower, to print another higher low, which could offer bullish traders who aren’t already in a position a solid entry point.
- PayPal has resistance above at $86.81 and $94.50 and support below at $82.07 and $77.36.
