PayPal Holdings, Inc. (PYPL) continues to benefit from the worldwide revolution in electronic payment processing and should reward long-term investors with healthy returns in coming years. Traders and market timers looking for shorter-term buying opportunities may also be in luck, with the stock consolidating in a bullish pattern that could yield a quick breakout to new highs ahead of the company's July 20 earnings report.

The stock underperformed parent eBay Inc. (EBAY) for more than a year following its 2015 initial public offering, forcing many folks who dumped the auction portal in favor of the digital wallet upstart to question their investment choice. However, PayPal stock has moved rapidly into a leadership role since April's breakout above the high posted just two weeks after it came public, gaining nearly 25%, while eBay shares haven't budged in nearly four months. (See also: PayPal Holdings, Inc.: Payment Tech's Growth Opportunity.)

PYPL Weekly Chart (2015 – 2017)

The stock came public near $38.00 in July 2015 and whipsawed into a set of highs and lows that established support at $30.00 and resistance at $42.55. Two successful tests at the low into early 2016 generated buying interest that ended after a failed March breakout attempt, reinforcing the broad trading range. The stock made slow progress for the rest of the year, building a set of higher lows while failing four breakout attempts into the first quarter of 2017.

PayPal stock consolidated in a narrow range at resistance between February and April, signaling growing strength ahead of an earnings-driven breakout that attracted momentum buying interest. The high-volume gap between $45 and $47 established new support that should not be breached if the stock turns tail in an intermediate correction. As a result, sidelined market players should keep a close watch on that level in coming months, awaiting an inevitable shakeout.

The uptrend stalled in the mid-$50s earlier this month, giving way to a small-scale range that is still under development as the second quarter comes to an end. The weekly stochastics oscillator crossed into a sell cycle at the same time, predicting a period of weakness driven by profit taking. So far at least, the stock has corrected through time rather than price, and it could easily break out ahead of earnings and add to its impressive 2017 gains. (For more, see: PayPal Rallies on Q1 Earnings Beat, Payment Transactions Up 23%.)

PYPL Daily Chart (2016 – 2017)

The most recent rally impulse started at $42 in April 2017, unfolding in an Elliott five-wave pattern that may have carved a fifth wave in the first half of June. The completion of this classic pattern typically yields an intermediate correction, but the stock has held up well since hitting an all-time high at $55.14 on June 9. This resilience raises the odds that the fifth wave will sub-divide into a broader series of new highs before the long-term buying cycle comes to an end.

The horizontal edges of the month-long trading range should offer useful buying or selling signals in this regard. The mid-month swoon found support just below $51, giving way to a V-shaped recovery wave that stalled just 4 cents below the prior high on June 26. This week's pullback found buying interest near the range's midpoint, generating a strong bounce that is now testing range resistance.

In turn, this price action has carved a potential 60-minute cup and handle pattern, with a breakout targeting $60, where a rising highs trendline is likely to slow or stall progress. Alternately, a breakdown through $50 will tell us that the weekly stochastics sell cycle is still in force, raising the odds for an intermediate correction that tests the first quarter breakaway gap, which also marks a continuation gap in the broader Elliot pattern. (See also: Elliot Wave in the 21st Century.)

The Bottom Line

PayPal shares broke out in April 2017 and rallied into a series of new highs that ended a few weeks ago with a reversal in the mid-$50s. The stock has been working its way through an adverse relative strength cycle since that time, showing resilience that could support a quick burst to new highs ahead of mid-July earnings. (For additional reading, check out: Why Apple, JPMorgan Want to Crush PayPal's Venmo.)

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

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