Security software provider Palo Alto Networks, Inc. (PANW) reported solid fiscal first quarter results on Monday evening, beating EPS and revenue estimates while raising second quarter and full-year guidance. The stock shot higher at the start of Tuesday's session, gaining nearly 10% before a mid-day swoon cut deeply into early gains. Even so, it closed at a four-week high, good enough to raise hopes for additional upside into year end.

However, a convoluted two-year price structure littered with multiple unfilled gaps predicts high volatility well into 2018, with bulls and bears so evenly divided that neither has generated a sustained trend since the July 2015 top at $200. An 89 million-share float with more than 86% locked up by institutions and insiders practically ensures wide bid/ask spreads and brutal price swings generated by predatory algorithms feeding on at-home gamers flipping the remaining 14%.

The $165 level marks the place to watch in this whirlwind, following four failed attempts to mount resistance since it broke in January 2016. The 200-day exponential moving average (EMA), currently rising through $137, presents a second inflection point because it has triggered multiple 2017 reversals. The most reliable positioning while we wait for those levels to be hit will be to sell strength and buy weakness, taking advantage of the two-sided tape while hitting the sidelines with quick exits. (See also: Palo Alto Networks Stock Could Rally Above $160.)

PANW Long-Term Chart (2012 – 2017)


The company came public at $55.15 in July 2012 and topped out quickly at $72.61. A persistent decline into the second half of 2013 found support in the upper $30s, carving a double bottom and a new uptrend that gathered strength into 2015, culminating in July's all-time high at $200.55. That euphoric burst evaporated in a vertical decline that reached $140 during the August mini flash crash.

A December test posted a slightly lower high at $194.73, while the subsequent pullback broke the August low in February 2016. That selling wave ended at $111 a few weeks later, generating a strong bounce that failed in March at the .618 Fibonacci sell-off retracement level in the mid-$160s. It returned to that harmonic level in October after posting a higher June low and reversed once again, reinforcing resistance that is still in play as 2017 draws to a close. (For more, see: Palo Alto Networks Beats on Q4 Earnings and Revenues.)

PANW Short-Term Chart (2015 – 2017)


Price action has held within the November 2016 into April 2017 trading range, while the initial reaction to this week's earnings nearly filled the gap between $158 and $144. It will take little effort for short-term price action to test resistance at $165 once again, but June and September 2017 gaps remain unfilled and could easily act as price magnets in the coming months, delaying the long-awaited breakout.

The stock broke out above a trendline of lower highs in September and has held new support that is aligned with the 200-day EMA at $137. A breakdown through that level would set off bearish signals that predict another trip to corrective lows between $100 and $110. Fortunately, on-balance volume (OBV) has lifted to a 2017 high following the news, signaling the return of institutional capital.

This tailwind should limit selling pressure in the coming months, eventually supporting a base breakout that brings the 2015 high into play. However, there is no advantage in early trade entry given volatile forces at play, predicting that the sidelines will offer the best place to watch testing at resistance. In the meantime, traders should look for short sellers to reload aggressive positions when the current uptick reaches the low to mid-$160s. (See also: 13 Ways to Invest in Cybersecurity.)

The Bottom Line

Bulls and bears show equal strength following Palo Alto Networks' upbeat earnings report, telling trend followers to stand aside until resistance at $165 gives way. Classic swing trading strategies could generate opportune profits until that happens, buying weakness and selling strength. (To learn more, check out: Are You a Trend Trader or a Swing Trader?)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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