Here's what Salesforce's stock needs to complete its breakout after earnings

By Tomi Kilgore

The software company's shares have climbed above a downtrend line but held below their 200-day moving average, while a key momentum indicator has remained capped

Salesforce Inc.'s stock has completed one part of its technical recovery since it's last, historically disappointing earnings report.

The question is, will the business-software giant's (CRM) earnings report on Wednesday help the stock complete its breakout rally, or squash it? Based on its current charts, completing a breakout would be a lot easier than re-establishing its downtrend.

Salesforce is slated to report second-quarter results on Wednesday after the market closes, so the fate of the stock will be determined on Thursday.

The current downside lean in Salesforce's stock started after it peaked at its March 1 record close of $316.88. The downtrend was punctuated with a 19.7% plunge on May 30, its biggest one-day selloff since July 21, 2004, after the company cut its subscription-revenue outlook.

But since that selloff, the stock rallied as much as 21.6% through Monday's close, enough for many on Wall Street to declare a new bull market.

Perhaps more importantly for chart watchers, the stock earlier this month cleared a downtrend line that started at the record high and connected a number of rally peaks in late March, April, May and July.

Trendlines are the simplest way to track a trend, and trendline breaks are the easiest way to determine whether a trend has ended.

But while the downtrend line has been cleared, there are still a couple key hurdles that need to be cleared before a new uptrend can be called.

For one, the stock hasn't been able to sustain gains above its 200-day moving average, which many on Wall Street believe marks a dividing line between uptrends and downtrends.

The stock cleared the 200-DMA briefly in early and late July, but each time quickly succumbed to a bout of selling that lasted more than a week.

The 200-DMA currently extends to $267.50 ahead of Wednesday's open, and should rise to roughly the $267.80 level on Thursday, based on recent FactSet data.

From current levels, with the stock closing Tuesday down 0.4% at $264.20, it would only have to rally roughly another $3.30, or 1.2%, to get above the 200-DMA.

That's nothing for Salesforce's stock post-earnings, as it has moved an average of $19.44 on the day after its past 12 quarterly reports, according to data provided by Matt Amberson, principal at Option Research & Technology Services.

There's another technical threshold that needs to be cleared before many chart watchers will say a new uptrend is ready to start.

The widely followed relative-strength index (RSI) is a momentum indicator that measures and relates the magnitudes of recent gains and losses. While the RSI can oscillate between 0 and 100, readings above 70 are viewed as depicting an overbought condition, while 30 is considered to be the oversold threshold.

But experience tends to suggest that becoming overbought, or oversold, reflects an ability rather than a condition. In other words, becoming overbought is actually a sign of underlying strength. (Read more about how overbought readings could be bullish.)

The RSI of stocks in a downtrend tend to be capped in the 55 to 65 range, while the RSI of stocks in uptrends tend to trough in the 35 to 45 range.

Since Salesforce's stock started recovering, the RSI peaked within the 55-to-65 band in early and late July, coincidentally at the same time the stock traded briefly above the 200-DMA.

More recently, the RSI has made multiple forays into that band since Aug. 15, but could only manage a high of 62.62 on Aug. 19.

So for bulls, just clearing the 200-DMA won't be enough. The RSI has to get above 65 for the buy bell to ring.

The RSI is currently at 58.92 ahead of Wednesday's open, according to FactSet.

Meanwhile, it would take a selloff in the stock below the Aug. 6 closing low of $238.42 - which is $25.78, or 9.8%, below Tuesday's close - to re-establish the downtrend.

Basically, it would be a lot easier for bulls to complete a breakout than for bears to regain the momentum.

-Tomi Kilgore

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08-28-24 0619ET

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