Cloud software giant Salesforce.com, Inc. (CRM) beat earnings estimates for the 11th consecutive quarter on Dec. 3, but guidance disappointed. The stock set its all-time intraday high of $167.56 on April 29 and then consolidated those gains for the remainder of the year. Since setting the high, the stock traded down to $137.87 into Aug. 14 for a correction of 17.7%, which has also been consolidated since then.
Salesforce shares closed Monday, Dec. 9, at $157.48, up 15% year to date and in bull market territory at 31.1% above the Dec. 24 low of $120.16. The stock is not suitable for value investors, as its P/E ratio is 117.04 and the company does not offer a dividend, according to Macrotrends.
The daily chart for Salesforce
The daily chart for Salesforce shows that the stock began 2019 with a strong upward surge. The close of $136.97 on Dec. 31 was an important input to my proprietary analytics, and its annual value level remains at $123.65. The close of $151.73 on June 28 was another input to my analytics, and this resulted in a second half semiannual pivot at $150.80. This level was a magnet between Aug. 1 and Oct. 28, before the stock regained upward momentum.
The close of $148.44 on Sep. 30 was also an input to my analytics, and the fourth quarter value level for Salesforce stock is $136.12. The close of $162.89 on Nov. 29 was the most recent input to my analytics, and Salesforce's monthly value level is $154.91, which held on Dec. 4 following the negative reaction to earnings reported on Dec. 3. This week's risky level is $166.27.
The weekly chart for Salesforce
The weekly chart for Salesforce will be downgraded to negative this week if the stock ends the week below its five-week modified moving average of $157.97. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $114.06.
The 12 x 3 x 3 weekly slow stochastic reading is projected to decline to 78.96 this week, down from 82.28 on Dec. 6, falling below the overbought threshold of 80.00. Going back to the week of March 8, 2019, this reading was 90.54, above the 90.00 threshold indicating that the stock had become an "inflating parabolic bubble," which tracked the stock to a decline of more than 10%.
Trading strategy: Buy Salesforce shares on weakness to the monthly and semiannual value levels at $154.91 and $150.80, respectively, and reduce holdings on strength to the weekly risky level at $166.27.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels, and the semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sep. 30 established the level for the fourth quarter. The close on Nov. 29 established the monthly level for December.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.