One stock that has enjoyed big gains in 2023 is Salesforce (CRM).
We last checked on it in late June (right red arrow in the chart below). And the $200-billion customer relationship management software giant had rallied almost 80% from its December 2022 lows.
But it had become stuck in a sideways triangular pattern.
When a stock breaks out of a triangle, it can move strongly in either direction. So we needed to watch momentum to see which direction it would go.
After breaking to the upside, CRM hit a fresh peak and yearly high on July 19.
But with that move now fading, I want to check out what’s coming next…
Breaking Out of a Triangular Pattern
In the chart of CRM below, you can see where its year-long downtrend finished last December.
CRM built a base to rally as buying momentum steadily returned (red line):
Salesforce (CRM)
Source: e-Signal
That rally continued as the Relative Strength Index (RSI) broke strongly through resistance (green line) and into the upper half of its range.
That is where the RSI has remained until recently.
The 10-day Moving Average (MA, red line) also bullishly rose above the longer-term 50-day MA (blue line) in January, confirming the up-move. Both MAs then tracked higher.
When we looked at CRM on June 26, though, we saw that its rally was stalling into a sideways triangle pattern (orange lines).
Even another earnings beat for Q1 failed to propel CRM higher.
This triangle pattern emerges from diminishing conviction from both buyers and sellers. That causes them to abandon their positions earlier.
And that action is also reflected in the RSI.
As the chart shows, the RSI zig-zagged support/resistance throughout this period (orange circle) without any definitive move in either direction.
Take another look:
Salesforce (CRM)
Source: e-Signal
As we noted back then, a strong move could be in the cards once the RSI broke out.
And that is what we saw.
With the RSI jumping higher, CRM broke out of the upper line of the triangle. That sent it up to its peak at ‘A.’
This up-move pushed the RSI into overbought territory (upper grey dashed line). The RSI reversed, and CRM also rolled over and fell.
Since then, the RSI has continued to drift lower. Now it is tracking back near oversold territory (lower grey dashed line).
And the 10-day MA is on the verge of crossing back below the 50-day MA. That’s the first time they have touched since the rally at the start of the year.
So what am I looking for next?
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Testing Resistance
The RSI is tracking close to oversold territory. So CRM could be due for a bounce against the downtrend following its high at ‘A.’
If the RSI does bounce, I’ll be looking closely at what happens around resistance (green line).
For CRM to resume its rally, the RSI needs to return to the upper half of its range.
If the RSI rebounds lower off that level, then that could set CRM up for an even bigger move down.
The other thing to watch is our two MAs. They are on the verge of crossing over.
The 10-day MA crossing strongly below the 50-day MA would add further weight to any growing down move.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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