PayPal: Mastering Risk, Seizing Significant Opportunity (Technical Analysis) (NASDAQ:PYPL)

On November 24, 2023, I wrote an article exploring the fundamentals of PayPal Holdings, Inc. (NASDAQ:PYPL) and its competitor Block, Inc. (NYSE:SQ), while performing a deep dive into the companies’ financials, discussing the risks each actor faces, and finally evaluating the company’s fair stock price. My conclusion was that PYPL was significantly undervalued, allowing investors to profit from a 57% increase in the stock price. This article focuses on exploring further opportunities or threats for investors in the short term, while completing the investment case by casting light on the technical aspect.

A Macro Perspective

Since Q4 2023, the financial sector has experienced notable positive momentum following a relatively stagnant period earlier in the year. Recent data places the industry among the top five performing sectors within the US economy. This upturn can be attributed to several factors, including increased income streams and improved margins driven by higher interest rates, robust equity market performance, sustained consumer spending, and corresponding transaction volumes.

However, amidst this positive trend, there are concerns regarding the growing levels of credit spending. In Q4 2023 alone, US consumers amassed a record $1.13 trillion in credit card debt, marking a significant 14.5% increase. This surge underscores a substantial financial fragility, notably as credit card debt has surged by $273 billion since Q4 2021, accentuated by soaring interest rates, now averaging 24.59% for new credit cards, with many exceeding 30%. Furthermore, the decline in the personal saving rate to 3.7% in December 2023, down from 8.5% pre-pandemic and a peak of 32% in April 2020, raises concerns regarding financial stability. This trend suggests a dwindling buffer for individuals against financial shocks, potentially impacting overall economic resilience.

Meanwhile, technology companies are still the clear outperformers, led by the semiconductor industry and related groups, while the heavily consumer-spending related consumer electronics industry saw its expansion cooling down over the past month.

The Amplify Mobile Payments ETF (IPAY) bottomed in October 2023, and has since set up a strong rebound, leading the industry benchmark to test its EMA200, and break out from it in the past few weeks. The industry reference is building up relative strength when compared to the broader equity market, represented by the iShares Russell 2000 ETF (IWM), with increasingly positive momentum suggested by the Moving Average Convergence Divergence [MACD], and strengthening buying pressure, as indicated by positive trend of the On Balance Volume [OBV] indicator.

Where are we now?

Since my buy rating on PYPL on November 24, 2023, wherein I projected a weighted average price target of $89, the stock has significantly increased, topping $68.21, or 21% higher on January 22, 2024, and has since consolidated below its short-term Exponential Moving Averages [EMAs].

PYPL has tested a breakout from its EMA55 for the first since its massive sell-off was triggered in July 2021, and I am not surprised to see the first attempt fail. The rejection happened on significant distribution days, indicating that sellers are still positioned against an immediate continuation of the reversal attempt.

On the weekly chart, PYPL is still facing significant headwinds while struggling to build relative strength and being pushed down by its overhead resistance represented by its EMAs and the downward trending channel. However, the selling pressure is flattening, and more buying interest is observed in the OBV. Despite the rejection at the EMA55 happening at a significant volume, the following bars of the price action do not suggest a continuation of that magnitude. Instead, those smaller inside bars could offer an excellent contrarian entry.

While these insights were observed from PYPL’s weekly chart, it is crucial to zoom in and confirm them on the daily chart. This timeframe will provide a more transparent assessment of the structure of the recent rally, which may need to be more apparent on the weekly chart. By examining the daily chart, I can better gauge the dynamics and ascertain whether the stock’s current trajectory is sustainable or whether a corrective phase may be imminent.

What is coming next?

A closer examination of PYPL’s daily chart reveals an interesting situation: the stock is forming a lower high due to the retracement from the failed breakout attempt discussed earlier. While the stock struggles to outperform the industry reference, the Amplify Mobile Payments ETF, displayed in the ongoing relative weakness; other elements give a more positive outlook. The selling pressure measured by the OBV is stabilizing and could even trend higher if the breakout from its 21-day EMA is successful; additionally, the MACD is crossing positively, suggesting a reversal of the latest retracement.

PYPL is moving sideways between the descending and the ascending trending channels, pointing in the direction of the confluence of the channels, which is typically considered an essential point for a potential breakout or a breakdown.

A closer look at the price action indicates the presence of significant gaps that PYPL left open during the past months. To begin with, a runaway gap between $55.25 and $54.78 could drag the stock down in an attempt to get filled; here, I would consider setting my stop-loss below the gap, around $54, as this area would be decisive for a continuation of the downtrend or a possible profitable entry point for a rebound.

On the upside, PYPL left two massive gaps between $60.65 and $62.85 and between $68.24 and $72.48. These gaps are in confluence with targets identified based on liquidity pools left in the Fair Value Gaps [FVG], which typically get chased down and ideally filled but at least tapped in to access the liquidity.

In my base scenario, PYPL is on its way to establishing a new uptrend. Here, the lower high around $55.85, and more importantly, the area below $54.78, should be maintained for this assumption to be confirmed. In this scenario, I consider the discussed price ranges as my targets and would see PYPL breaking out from its EMA200 on the daily chart and EMA55 on its weekly chart, setting a significant milestone for further upside potential.

On the other hand, breaking under the discussed support levels would mean more downside risk ahead, and I would consider lowering my commitment to PYPL according to my risk tolerance. It is important to note that the stock is technically still in stage four despite the early signs of a possible inversion in its downtrend and, therefore, advancing into stage one. If the stock breaks below the support area, it might still have some downside potential in the short to mid term, a risk that investors should mitigate with appropriate stop losses, as it will always be possible to scale into the stock with better success probabilities.

Considering my observations and the early signs of a possible reversal, I validate my assumption of a buy rating on PYPL, even in the short term, while strictly respecting the discussed contingency plan to limit potential losses.

The bottom line

Technical analysis is a valuable tool for investors, offering guidance and increasing the probability of success rather than providing definitive answers. Analogous to consulting a map or GPS before embarking on a journey, investors utilize technical analysis to navigate the market. I employ techniques rooted in the Elliott Wave Theory and Fibonacci’s principles to gauge potential outcomes and probabilities over time. By assessing the likelihood of specific outcomes based on these theories, I aim to pinpoint optimal stock entry points, considering price action, sector trends, and industry dynamics. Ultimately, my technical analysis endeavors to comprehensively evaluate a stock’s situation, empowering investors to make well-informed decisions and navigate the market effectively.

In summary, the financial sector has displayed notable positive momentum since Q4 2023, placing it among the top-performing sectors in the US economy. However, concerns arise from escalating levels of credit card debt and a declining personal saving rate, signaling potential financial fragility. Meanwhile, technology companies, particularly in the semiconductor industry, continue to excel, contrasting with a slowdown in consumer electronics. Analysis of PYPL’s stock reveals a complex picture, with indicators suggesting both upside potential and downside risks. A close watch on critical support and resistance levels is crucial for informed decision-making, supporting a buy rating on PYPL with a cautious approach to risk management.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.