GPN Posts Strong Earnings, Surges on Possible Breakaway Gap

Following a solid two-year 50-point impulse wave that drove Global Payments, Inc. (NYSE: GPN) to what was then its all-time high, the stock entered a lengthy period of consolidation that encompassed all of 2016.  At its deepest point, the correction retraced over 40% of the total impulse wave, however subsequent price action in the corrective wave pulled price back to the top of the impulse that ended in December, 2015.

The weekly chart shows the overall price action best, so we'll start our analysis there.

GPN Weekly Chart

What started to develop as an A-B-C flat correction quickly turned complex, and the corrective wave essentially traveled sideways for the entire year. Our first indication that something had changed came in the strong bullish candle drawn last week on higher volume.  This morning's earnings announcement told us why the stock was suddenly starting to move.

GPN posted $0.89 EPS, beating consensus estimates by $0.04, and they posted $817.2 million in revenue, beating consensus estimates by $13.65 million.  That revenue represented a 57.7% year over year gain.  Most importantly, GPN increased forward guidance, setting revenue expectations for 2017 in the $3.35-$3.45 billion range, and full-year EPS to $3.70 to $3.90.  In addition, they raised their stock buyback target to $300 million.

The news to open the week was very well received, and GPN gapped up $5.34 at the open.  The rest of the day traded strong as well, with the close finishing in the upper 50% of the daily range.  That's not bad on an earnings day when it's common for early exuberance to be pulled back as the session runs its course.

Today's gap appears to be a breakaway gap that may signal the start of Wave-3 in the overall impulse pattern.  We're looking at a weekly chart, however, and that candle is only 20% complete at this point, so let's not count the gap a done deal just yet.  Instead, let's zoom into the daily chart and see what potential plays may develop.

GPN Daily Chart

Sure enough, that gap looks impressive on the daily chart as well.  There's some indication that insiders started to move this stock as early as 3 January, and you can see that two significant resistance levels were pierced in last week's trading. 

This was an earnings day, so volume was expected to be higher than average, and indeed, it was.  Notice where the stock finally closed, however.  We're in the middle of a resistance zone that defines the all-time highs for the stock.  Long term traders - i.e., those that are willing to play in time horizons greater than a year - may be willing to enter if price tops today's candle.  After all, if this is indeed the start of Wave-3, there's a potential 50-point run or more in play. Those of us that play in shorter time-frames, however, would prefer a bit of a pullback from here before entering a long position. 

After that long a horizontal consolidation, we can anticipate at least one retest of what should turn into a support line before the next impulse gets underway in earnest.  You can see the various areas of support on the daily chart.  The green zone we show starting at the middle of today's candle is the area where we would consider an entry following a pullback.

Sure, it's entirely possible that we'll miss the entire move by waiting for the pullback.  It's more likely, however, that we'll avoid being caught in a bull trap.  Channel players would have entered short around $79.04, and based on today's action, the weaker hands will be looking to cover their positions, escaping with a small loss.  Similarly, breakout players would have entered long as price approached $80.  There are likely more buy stops in place now just above today's candle, so there's short-term pressure building to push the stock ever so slightly higher.  That's the type of pressure that market specialists prey upon, and they may very well attempt to shake out those weaker hands by pulling the stock back far enough to trigger sell stops.  That would be our cue to enter since we want to go long when the market specialists are going long, not when the retail traders are entering prematurely.

One thing we'll watch is volume on the pullback.  If this is a legitimate upward move, then volume will be relatively light on the downward swing.  The final true breakout should be on high volume.  Today's volume was high, however it was an earnings day, so even without a breakout it should be high. We'll watch for a sign that the insiders are stepping into this stock and join them at that point.  Watch for a pullback into the green zone and then a strong move up on convincing volume.  That will be our signal to enter.

Happy Trading.