Okta, like most Cloud stocks, has been on an epic run since going public. However, Okta’s price action is showing signs of slowing down. With 5 waves up from the beginning of this long-term uptrend, which started in late 2017, Okta’s final 5thwave in green had its own extended 5thwave, noted in magenta. When a stock completes it’s larger degree 5thwave structure, like we see in green, I tend to get cautious.
Okta has taken out its 8-day, 21-day, and 50-day Moving Averages. As long as the 200-day is not breached, Okta can rebound and continue this uptrend, which would reset my primary count above, and see Okta extend further before taking a breather.
Let’s start with the price trend line in blue, which started off the December lows in 2018.
You’ll notice a clear uptrend that the price action respected, even in the June correction of this year. Note that at the peak of this uptrend, just above the maroon arrow, Okta’s price broke through this trendline with force. Also, if you look at the RSI leading up to this moment, you’ll see it making lower lows while the price action is making higher highs, which is signaling weakness, and a coming pullback. This is a very typical pattern we see just before a pullback.
Furthermore, my 2 favorite momentum indicators, the MACD and RSI, both showed the same uptrend within these indicators. At the exact same moment, highlighted with the maroon arrows as well, you’ll notice that they too broke their uptrend.
This outside day pattern is a rather notable pattern where a single day of trading engulfs the prior day’s high and low. What makes this pattern strong is that it engulfed not only the day prior, but nearly 2 weeks of trading days before it. It also dramatically closed below the prior days and it did so on heavy volume. You’ll see that what followed was the beginning of a trend change. When I see a moment where multiple trendlines are broke, as well as an outside day reversal pattern, I take note of a possible reversal in sentiment – the extent to which is yet to be seen.
However, it’s worth noting that the buying pressure is still strong with Okta. Until the RSI breaks the 40 line, and the $118 support is broken, Okta could continue higher.
Relative Strength Index
Looking at the RSI, we see the buying pressure that is still evident in Okta. In the first chart, which shows a longer time frame, you’ll notice a similar RSI trend that was broken. When a momentum trend breaks, it typically signals a correction is imminent; however, the extent to which is always in question.
Keep in mind that the 40 line is a crucial support for a bullish continuation; notice how this line played out in each trend break, which is noted by the first line of maroon arrows, which occurred in June of 2018. The RSI trend broke, as price began to retrace. However, the RSI held the 40 line, and began a new uptrend, which was a rather shallow pull back.
The next RSI trend break occurred in October of 2018, also noted by a line of maroon arrows. This time, the RSI collapsed beyond the 40 line into bearish momentum territory. What followed was roughly a 40% pullback.
Where we are today, is more similar to the first example of the RSI trendline breaking, so far. The RSI broke its trend line, but has held support at the 40 line. The price action today is in a holding pattern, which can be noted in the RSI holding a tight pattern between the 60 and 40 line.
More information is needed from earnings to determine if we get a continuation of the bull trend, or a further retrace.
Where we are:
As stated, Okta’s price action is slowing. It has broken numerous trend lines, both in price and momentum, and signaled a possible sentiment change with the Outside Day Reversal Pattern shown. However, it has yet to follow through both on price and momentum, showing that the buyers are still very excited about this stock. The earnings report will likely be the catalyst for the direction of this stock as well as the trading plan you might want to follow.
It should be noted, with a Price to Sales hovering around 34, coupled with no earnings, Okta is priced to perfection. If Okta’s price breaks the $118 support, we will likely see a deeper correction that can take us to the green box highlighted in the chart, which I have as likely targets around key retracements, highlighted in black.
On the other hand, if Okta’s price breaks to all new highs, around $142, we can see an extension of the uptrend. If you decide to play the continuation of this momentum, it will be crucial that you put tight stops in place – $142, but no lower than $118.