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Buy PayPal Stock as It Gaps Higher on Consumer Spending

Buy PayPal on weakness to its semiannual and quarterly value levels at $119.67 and $118.96, respectively. The sky’s the limit when you have a rising stochastic reading and no risky levels.

PayPal  (PYPL) - Get PayPal Holdings, Inc. Report gapped significantly higher on Thursday, May 7 after beating revenue estimates after the close on Wednesday. 

The stock closed Wednesday at $128.31 and traded as high as $145.08 at the open on Thursday, up 13%. Further gains are likely given strong momentum on its weekly chart.

Consumer spending rose in April from households on lockdown. E-commerce activity from consumers more than offset weakness in spending on travel and events.

PayPal stock opened Thursday at $139.92 up 29.4% year to date and in bull market territory 70.5% above its March 23 low of $82.07. 

New highs continue in today’s trade. It is a strong momentum runup as shown in the rising trend of its 12x3x3 weekly slow stochastic reading.

My proprietary analytics do not show a risky level which is a sign that higher highs are likely.

The Daily Chart for PayPal Stock

Daily Chart for PayPal Stock

Daily Chart for PayPal Stock

Courtesy of Refinitiv XENITH

The daily chart for PayPal stock shows a crisscross pattern for its 50-day and 200-day simple moving averages. This resulted in false golden cross and death cross patterns as shown on the chart.

The stock began 2020 with a semiannual risky level at $119.67. This level provided a trading opportunity to sell the stock below it declined to $82.07 on March 23.

The stock returned to the semiannual pivot and its quarterly pivot at $118.96 between April 23 and May 1.

This set the stage for the positive reaction to earnings released after the close on May 6.

Its monthly value level for May lags at $110.39.

The Weekly Chart for PayPal Stock

Weekly Chart for PayPal Stock

Weekly Chart for PayPal Stock

 Courtesy of Refinitiv XENITH

The weekly chart for PayPal stock is positive with the stock above its five-week modified moving average of $117.54. 

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The stock is well above its 200-week simple moving average or “reversion to the mean” at $79.06.

The 12x3x3 weekly slow stochastic reading is projected to rise to 72.00 this week up from 71.99 on May 1.

Trading Strategy

Buy PayPal stock on weakness to its semiannual and quarterly value levels at $119.67 and $118.96, respectively. 

The sky’s the limit when you have rising stochastic readings and no risky levels.

Whenever you are chasing momentum for a trade, maintain a sell stop to lock in gains or limit losses.

How to use my value levels and risky levels

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each uses the past nine closes in these time horizons.

Second-quarter 2020 levels were set established based upon the March 31 closes. The monthly level for May was based upon the close on April 30.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum to find the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.