Compass Pathways (NASDAQ:CMPS) has been trading relatively stronger than the S&P 500 recently, in a mostly sideways consolidation pattern compared to the market ETF, which entered into a steep downtrend on Aug. 16.
The psilocybin therapy-focused life sciences company surged 181% between the weeks of May 16 and Aug. 8 and has spent the period since consolidating on decreasing volume on the weekly chart.
The gradual move higher paired with the horizontal consolidation may indicate the stock is settling into a long-term bull flag pattern. If the U.K. company breaks up from the pattern, it could mean another long-term bull run is in the cards not only for the psychedelic leader but for the sector as a whole.
The bull flag pattern is created with a sharp rise higher forming the pole, which is then followed by a consolidation pattern that brings the stock lower between a channel with parallel lines or into a tightening triangle pattern.
- For bearish traders, the "trend is your friend" (until it's not) and the stock may continue downwards within the following channel for a short period of time. Aggressive traders may decide to short the stock at the upper trendline and exit the trade at the lower trendline.
- Bullish traders will want to watch for a break up from the upper descending trendline of the flag formation, on high volume, for an entry. When a stock breaks up from a bull flag pattern, the measured move higher is equal to the length of the pole and should be added to the lowest price within the flag.
A bull flag is negated when a stock closes a trading day below the lower trendline of the flag pattern or if the flag falls more than 50% down the length of the pole.
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The Compass Pathways Chart: To indicate that the bull flag pattern on the weekly chart is recognized, traders will want to watch for the stock to break up from the upper descending trendline of the flag on higher-than-average volume. If that happens, the measured move indicates Compass Pathways could eventually soar up toward the $42 mark.
- When the price history of this week and last week is combined, Compass Pathways may also have printed a double bottom pattern at the $15.08 level. The double bottom pattern combined with the bull flag formation may help the stock to gain momentum if the stock breaks up higher.
- The Altrincham, Cheshire-based company is trading in an inside bar pattern on the weekly chart, which leans slightly bullish although the stock was trading lower before forming the pattern. The pattern leans bullish because the stock looks to be ready to end this week near the upper range of last week’s mother bar.
- From a bearish perspective, Compass Pathways is trading in a fairly consistent downtrend on the daily chart, with the most recent lower high formed on Aug. 25 at $18.74. The stock hasn’t printed a lower low under the Aug. 22 low of $15.08, however, which may indicate a symmetrical triangle pattern will develop on the time frame.
- Compass Pathways has resistance above at $18.03 and $21.26 and support below at $15.59 and $13.22.
