STM Soars 5.97% as Bullish Engulfing Pattern Validates Key Support Breakout

Candlestick Theory

The recent 5.97% surge in STMicroelectronics (STM) reflects a bullish reversal pattern, particularly a "Bullish Engulfing" candle on August 12, where the price closed near the high of $26.25. This suggests strong buying pressure following a prior bearish trend. Key support levels are identified at $24.50–$24.80 (based on prior consolidation and intraday lows), while resistance aligns with the recent high of $26.36. A breakdown below $24.72 (August 11 low) would invalidate the bullish setup, whereas a retest of $26.36 could trigger a continuation pattern if volume confirms.

Moving Average Theory

The 50-day moving average (MA) currently hovers near $25.50, the 100-day MA at $25.00, and the 200-day MA at $25.50. The price has crossed above the 50-day MA, indicating a short-term uptrend, while the convergence of the 50-day and 200-day MAs near $25.50 suggests a potential consolidation phase. A sustained close above $25.50 would reinforce bullish momentum, whereas a drop below the 100-day MA could signal a deeper correction. The 200-day MA acts as a critical psychological level; a break above $26.36 may align with the 50-day MA, reinforcing a multi-timeframe bullish bias.

MACD & KDJ Indicators

The MACD histogram has shown a narrowing bearish divergence in early August, followed by a bullish crossover (Golden Cross) on August 12, aligning with the recent price surge. However, the backtest of this strategy underperformed (-14.11% return), indicating potential false signals in volatile conditions. The KDJ indicator (Stochastic RSI) shows %K above %D, suggesting short-term momentum, but a bearish crossover in mid-August preceded the sharp decline on July 24. This divergence implies caution: while the recent Golden Cross supports a short-term rally, the KDJ’s bearish history suggests overbought conditions may not hold.

Bollinger Bands

Volatility has expanded significantly since July 24, with the bands widening after a period of contraction. The price has tested the upper band multiple times, most recently on August 12, indicating overbought territory. A sustained close above $26.36 could trigger a breakout, but the bands’ recent expansion suggests a high probability of mean reversion. Conversely, a drop below the middle band ($25.50) would signal a return to consolidation.

Volume-Price Relationship

Trading volume spiked on August 12 (8.8M shares), validating the bullish breakout. However, volume has since declined, with mixed activity in subsequent sessions (e.g., 6.4M on August 11). This suggests that while the initial move was strong, follow-through buying may be waning. A sustained increase in volume during a retest of $26.36 would confirm institutional support, whereas a volume contraction would indicate weak conviction.

Relative Strength Index (RSI)

The RSI has oscillated between 30 and 70 over the past month, avoiding overbought/oversold extremes. The recent surge pushed the RSI to ~65, approaching overbought territory but not yet triggering a sell-off. A close above 70 would signal potential exhaustion, while a drop below 50 would indicate weakening momentum. The RSI’s failure to make higher highs despite rising prices since mid-August suggests a bearish divergence, cautioning against aggressive long positions.

Fibonacci Retracement

Key Fibonacci levels from the July 24 low ($26.06) to the July 31 high ($25.43) include 38.2% at $24.50 and 50% at $24.00. The current price is above the 38.2% level, suggesting that a pullback to $24.50 could find support before resuming the uptrend. A breakdown below $24.00 would target the 61.8% level at $23.50, indicating a deeper correction.

Backtest Hypothesis

The MACD Golden Cross strategy, which triggered a buy on August 12, resulted in a -14.11% return over 20 days, underperforming the benchmark by 53.76%. The Sharpe Ratio of -0.13 highlights excessive risk with minimal reward, while the 0% maximum drawdown suggests the strategy avoided losses but failed to capitalize on gains. This poor performance may stem from the stock’s high volatility and the strategy’s reliance on a single indicator without incorporating confluence with moving averages or volume. Future iterations should integrate Fibonacci levels and volume validation to filter false signals.