Peloton (PTON) Could Lose Ground in Coming Weeks

Peloton Interactive, Inc. (PTON) is doing a great job working through big supply created by the two-legged correction that dropped shares of the fitness juggernaut more than 34% in October and November. Even so, the current price pattern does not favor a breakout and fresh bull run, so shareholders may wish to take defensive measures and get ready for another selling wave when the calendar flips into January.

The stock has posted a historic 430%-plus return so far in 2020, making it a prime candidate for January tax selling pressure. A simple mechanism underlies this long-observed phenomenon, with investors trying to lower capital gains taxes by holding onto their biggest winners into the new tax year. This is the flip side of the January Effect, in which the same folks often load up on their prior year's biggest losers.

Admittedly, this is a special case due to the raging pandemic, with renewed lockdowns and social distancing requirements likely to underpin fourth quarter sales. However, the market operates through a "discounting mechanism" that often ignores current events and predicts conditions six or more months into the future. Brick-and-mortar fitness centers could be back in business by that time, with multiple vaccines heading into distribution.

The Peloton growth story will continue in 2021 because the company's products are addictive and many folks will work remotely for years to come. However, the stock now holds a market cap of $33.8 billion, higher than one-third of Nasdaq-100 components, while trading at a lofty 8x projected fiscal year 2021 revenue. It's hard to see how this is sustainable, given the extraordinary psychological relief and return to normalcy that will come when the pandemic runs its course.

Wall Street consensus is steadfastly bullish on Peloton stock despite the upcoming challenges, with a "Strong Buy" rating based upon 19 "Buy," 3 "Hold," and 0 "Sell" recommendations. Price targets currently range from a low of $110 to a Street-high $160, while the stock is set to open Tuesday's session about $18 below the median $142 target. There's clearly upside potential into the October peak given this humble placement, but another robust bull run appears unlikely.

Peloton Daily Chart (2019 – 2020)

The company came public at $27 in September 2019 and turned higher in November, topping out at $37.02 less than one month later. It sliced through the IPO opening print during the first quarter decline and bounced strongly, reaching the 2019 high in April. A rounded pullback completed the handle of a bullish cup and handle pattern, ahead of a May breakout that attracted intense buying interest.

The rally paused in July and again in September, but bulls remained in charge, keeping price well above the 50-day exponential moving average (EMA). A narrow channel marked the last wave of the advance, which posted an all-time high at $139.75 in October. The stock turned lower into November and gapped through the moving average, tagging that level for the first time since April. The 19-point gap just got filled on Monday, setting off a popular signal for short sellers to reload positions.

However, the on-balance volume (OBV) accumulation-distribution indicator shows healthy buying interest since the November low, with OBV lifting to a new high. This bullish divergence often foretells strong price action, but the pattern since October looks disjointed and incomplete, suggesting another selloff before the stock can test the all-time high. Long-term relative strength readings are flashing the same message, predicting two-sided price action into the first quarter.

The Bottom Line

Peloton stock shows healthy buying interest off the November low, but another bull run may not be in the cards.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.