PayPal Holdings, Inc. (PYPL) reports earnings after Wednesday's closing bell, with Wall Street analysts expecting the digital giant to post earnings per share (EPS) of $0.75 on first quarter 2020 revenue of $4.72 billion. The company beat fourth quarter 2019 estimates in January but lowered first quarter profit and revenue guidance due to a series of acquisitions. The consensus outlook has continued to decline in the past three months as a result of the coronavirus pandemic.

The company is well positioned to survive during the crisis, with the multi-year collapse of cash transactions intensified by quarantines and stay-at-home orders. However, digital sales volumes react strongly to economic cycles, growing during periods of expansion and shrinking during periods of contraction. With 30 million Americans out of work, PayPal's profit outlook has taken a major hit that is likely to continue in the next one or two quarters, at a minimum.

The stock has acted well in the past seven weeks, carving a V-shaped pattern that has now completed a round trip into February's all-time high at $124.25. However, that level is situated just three points above the 2019 high and still marks resistance because the first quarter decline failed the breakout. In addition, accumulation has failed to recover at the same pace as price, with both elements raising the odds for a downside reversal after earnings.

PYPL Long-Term Chart (2015 – 2020)

Long-term chart showing the share price performance of PayPal Holdings, Inc. (PYPL)
TradingView.com 

The company came public in July 2015 through a spin-off from parent eBay Inc. (EBAY), opening in the mid-$30s and entering an uptrend that topped out a few days later at $42.55. That level marked resistance for nearly two years, giving way to a rapid descent to an all-time low at $30.00, followed by narrow range-bound price action. An October 2016 breakout attempt failed, while a second effort in May 2017 cleared the barrier, establishing a strong uptrend.

The subsequent advance stalled in the mid-$80s in the first quarter of 2018, but committed bulls maintained a shallow rally trajectory, adding a few points into September. The stock held up well during the fourth quarter swoon that year, finding support at the 50-week exponential moving average (EMA), ahead of a 2019 uptick that reached new highs in February. This rally wave ended at $121.48 in July, establishing a tough barrier that is still guiding price action.

A steady pullback into October ended on top of the first quarter breakout level, yielding a rounded basing pattern, followed by a bounce back to the prior high. The stock rallied to a new high on Feb. 14 but turned tail just four sessions later, triggering a failed breakout that pierced October support. Selling pressure eased at a 14-month low near $80, holding above the low posted in the fourth quarter of 2018 before turning higher into April.

PYPL Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of PayPal Holdings, Inc. (PYPL)
TradingView.com

The on-balance volume (OBV) accumulation-distribution indicator topped out with price in July 2019 and entered a shallow distribution phase that ended at the start of 2020. Accumulation into February reached resistance with price, ahead of a reversal that reinforced resistance at the red lines. OBV has bounced strongly off March's 52-week low but hasn't reached the resistance line, raising doubts about buying power ahead of the earnings release.

The price pattern since May 2019 also raises a red flag, with horizontal resistance and descending trendline support. Healthy uptrends tend to unfold through higher highs and higher lows, but the rally into May has failed to carve a higher low. This lopsided appearance raises the odds that a rally to new highs will fade quickly, printing a higher high within a bearish expanding formation, which is also known as a megaphone pattern. As a result, it makes sense to watch OBV for a reversal at the red line before committing capital after the news.

The Bottom Line

PayPal stock has rallied back to 2019 and 2020 resistance, but additional price development may be needed for a sustained breakout.

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