We’ve had some interesting action in IRBT lately. I’m glad we’ve seen this kind of price action, because I frequently get questions on how to react to this kind of activity. Basically what happened here is IRBT was in an uptrend channel. It broke out of the channel to the upside, but failed to capitalize on the breakout. This pushed the stock back into the old upward trend channel where IRBT found support.
So, after the failed breakout we saw a return to the previous uptrend channel. This is a near term positive for the stock. We were unable to capitalize on a breakout of the top of this long standing uptrend channel (blue dashed line). The breakout in January ran right into very strong resistance (red dashed line) at 23. This level was old support on the way down and is now proving itself to be very strong resistance.
A few months ago, when the rally was still strong, the RSI was in a fabulous uptrend channel itself. This is usually great confirmation for the bulls. When IRBT took a turn for the worse, we had the RSI at overbought levels (although it wasn’t too bad) and, of course, we were struggling at resistance. This is a great signal that buyers are exhausted.
We had a sizable gap down after iRobot announced earnings, but you can see that plenty of buyers still existed at the old trend channel support. The RSI also broke trend on that gap down. That is usually a sell signal. It wasn’t a short signal, per se, but it could have been used as a take profit signal because of the other variables we had.
We are looking to the uptrend channel to continue to provide support in the coming days. A breach of that level could be bad news for IRBT bulls. The next key support level is actually the open price of the gap down at 19.25 (green line). You can see how we moved higher after we broke out of that gap.
The red dashed line at 23 is going to our main focus. A breach above that level could open up IRBT to new heights.
I favor the upside trend in this stock, but I certainly wouldn’t be a buyer any time soon. If I already had a position, I would just remain cautious of the support and resistance levels mentioned here.
The first thing you may notice is the buy signal we may have in the works. Let’s first mention this strong support we got at 20.80. It’s true that IRBT selling pressure got a little overextended, but that’s expected after such a large gap down. Despite this fact, the 20.60- 20.80 area found some buyers. So, these are my conditions:
For now, I won’t speak about possible profit taking and stop loss areas because there is no buy signal at this point.
Key resistance is going to be the ceiling we have in place at around 23.75. Just as on the daily time frame, A breakout of that level could really push IRBT higher. We’ll have to see what happens.
So, to conclude, I would expect some sideways action in the short term. I may even favor the upside a bit because we could find more buyers at support. In the intermediate term, I expect prices to rise, but I would be conscious of the support levels. If those levels can hold (mainly the trend channel), then the rally is still on.
Special thanks to Stefan for requesting this stock. If you would like me to analyze an investment for you, just leave a comment below.
Thank you for reading.
This article was written by joe.shehata