Stocks normally go through a cyclical pattern of bull and bear phases. The recent pullback in growth stocks has reminded market participants of how quickly the bearish rotations can completely change the character of the markets. And while some may be tempted by stocks like Salesforce.
com (CRM) showing short-term strength after recent weakness, savvy investors know that the charts will often provide a clear signal of a recovery phase. The daily chart of CRM illustrates a clear bullish period from the October 2023 low to a peak around $320 in late February 2024. From that peak, we can draw a simple trendline to track the fairly consistent pace of the decline that arguably remains in place in early August.
I would point out that the most bullish piece of evidence for CRM is the impressive rally off the gap lower in late May. When a stock gaps lower, usually around a quarterly earnings release, it's important to see what happens right afterwards. Are investors buying in on the short-term weakness, thrilled to pick up shares of a quality company at a discount? Or do we see evidence of further selling, as traders are willing to take a loss to avoid an even bigger potential loss in their account? In the case of CRM, we can see that buyers came in after the gap lower, quickly pushing the price from a low around $210 back up to $165 in early July.
What to watch But even though the upside reaction was indeed impressive, three factors prevent me from considering Salesforce.com as an attractive stock at current levels. First, CRM has failed to eclipse its 200-day moving average from below, despite numerous attempts to do so over the last six weeks.
As articulated in a market maxim often attributed to Paul Tudor Jones, "Nothing good happens below the 200-day moving average." So until a stock like CRM can push above this key long-term barometer, it's usually best to find opportunities elsewhere. Second, the RSI remains in a bearish range, suggesting that price momentum is still not strong enough to elicit stronger gains to the upside.
I've shaded the RSI indicator green during bull phases (RSI ranges between 40 and 80) and bearish phases (RSI remains between 20 and 60). During a bearish price trend, the RSI often fails to push above the 60 level, meaning that there's just not enough buying power to propel the stock out of the downtrend. In the case of CRM, the RSI pushed into the bearish range in April when the stock failed to hold its 50-day moving average.
As long as the RSI remains in this bearish phase, Salesforce.com just isn't demonstrating the signs of demand that often accompany a strong price recovery. Finally, I often come back to simple measures of price trend, in this case, the trendline we shared in our first chart above.
Until and unless CRM can push above trendline resistance, I'd much rather look for better opportunities with charts showing signs of strength instead of clear signs of weakness. -David Keller, CMT marketmisbehavior.com DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium.
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