ServiceNow Stock Could Fail May Breakout

Cloud service provider ServiceNow, Inc. (NOW) has gained more than 35% since joining the S&P 500 index in November 2019, shaking off a 34% decline during the first quarter's pandemic-driven swoon. The resilience highlights superb performance since the stock came public in 2012, lifting over 1,400% since the first trade in the mid-$20s. A rapid growth trajectory has underpinned the extraordinary advance, with the company now the 93rd highest-capitalized index component.

Wall Street has been pounding the tables on ServiceNow stock, posting 19 BUY ratings, five HOLD ratings, and no SELL ratings. However, the rally has now lifted into the top half of 12-month price targets, raising the potential for downgrades if quarterly performance fails to match the lofty 112 price-to-earnings ratio (P/E). The company has offered no guidance since April's first quarter 2020 release, when it projected revenue growth of 29% to 30% for the first quarter and 28% to 29% for the fiscal year.

Technical indicators generally support the uptrend, but growing red flags should not be ignored. First, the stock rallied above the February high in May but has made limited progress, raising the odds for a failed breakout. Second, buying power hasn't kept up with bullish price action, indicating that the supply of potential investors is shrinking. Third, the rally has reached a resistance level that has triggered three major downturns in the past 22 months. 

NOW Long-Term Chart (2012 – 2020)

Long-term chart showing the share price performance of ServiceNow, Inc. (NOW) 

The stock eased into a strong uptrend after June 2012 initial public offering (IPO), lifting to $41.77 in September. The subsequent pullback ended a few points above the IPO opening print, reinforcing support in the mid-$20s, ahead of an uptick that completed a round trip into the prior high in April 2013. A July breakout carved a healthy series of higher highs and higher lows before stalling just above $70 in the first quarter of 2014.

A rally above that barrier one year later made limited progress, reaching the low $90s before an early 2016 decline triggered a failed breakout. Downside eased near a two-year low, while the subsequent bounce took more than 14 months to post a new high. The uptrend then entered the most prolific period since coming public, more than tripling in price into the February 2020 high. The stock sold off with broad benchmarks into March and recovered at the same trajectory, breaking out to a new high once again on May 5.

Price action since August 2018 has carved an expanding wedge pattern, with proportional rallies but progressively severe declines. Current shareholders should take note of the recent reversal at wedge resistance because it raises the odds for a correction that has the potential to reach the $270s. While the turnaround is just a red flag for now, a decline that undercuts the February high would set off a sizable sell signal.

NOW Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of ServiceNow, Inc. (NOW)

The on-balance volume (OBV) accumulation-distribution indicator posted a 10-month low in November 2019 and entered an accumulation phase that reached the prior peak on May 20, two weeks after the breakout. OBV hasn't budged since that time, while price action has carved a series of whipsaws at new support. The combination warns market players that committed bears are contesting the breakout and could trigger a reversal that undercuts the black line. The 50-day exponential moving average (EMA) would then act as the final arbiter of the rally, generating a bounce or breakdown.

There isn't much for shareholders or potential investors to do at this juncture, except to tighten up stops and watch the ticker tape, with one eye on the S&P 500 index. As we saw in the first quarter meltdown, algorithmic and human sellers focus their attention on major sector funds during broad-based downturns, and the stock could easily get pulled through support if the SPDR S&P 500 ETF Trust (SPY) and the S&P 500 futures contract get targeted for selling. 

The Bottom Line

ServiceNow stock has outperformed broad benchmarks so far in 2020, but cracks are starting to appear in the strong uptrend.

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

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