Snap Inc. (SNAP) stock jumped 22% after the company beat fourth quarter profit and revenue estimates in early February, and it has added another 17% into March, lifting to a six-month high in the double digits. However, the rally has now reached resistance that could end the upside and drop the stock into a test of the 2018 low posted in December. Given this technical hurdle, shareholders may wish to tighten stops or take profits to preserve windfall gains.
The company is booking more revenue per user, but daily average users (DAUs) failed to grow in the fourth quarter while declining 0.3% year over year, ahead of a highly touted redesign of Snap's Android interface. The company offered no first quarter DAU guidance but was "cautiously optimistic" that there would be no sequential decline. Given the 43% buying spree in the shares since those mixed metrics, it's likely that the stock is now fully valued.
Raymond James upgraded the messaging giant after the quarterly release, but other Wall Street firms weren't as impressed by the results or forward guidance. Deutsche Bank lowered its price target on Snap to $10.00 while maintaining a Hold rating, concerned about user growth and engagement, while JPMorgan and Needham reiterated sub-par ratings on the stock. This lack of enthusiasm suggests that retail money has fueled the recent rally rather than institutional participation.
SNAP Weekly Chart (2017 – 2019)
The company came public at $24 in March 2017 and posted an all-time high at $29.44 in the following session. It then turned tail, cutting through the IPO opening print and dropping into the upper teens. Price action held that support level for three months and broke down, selling off to $11.28 in August 2017. A six-month basing pattern at that level yielded a February 2018 breakout that ran into a buzzsaw of selling pressure, topping out at $21.22 after a single session.
The stock drifted lower into April 2018, filling the breakout gap, and trapped overeager bulls when it cut through nine-month support a few days later. A June test at new resistance allowed aggressive short sellers to reload positions, ahead of a brutal 67% decline into December's all-time low at $4.82. Snap stock has more than doubled in price since that time, returning to the price level traded in September.
The rally has now reached 50-week exponential moving average (EMA) resistance at $10, which also corresponds to the 200-day EMA, and is quickly approaching resistance at the September breakdown (red lines). Meanwhile, the weekly stochastics oscillator lifted into the overbought zone for the third time in the stock's two-year history in January 2019, well ahead of the February rally wave. It has now crossed over but will not issue a sell signal until the lead line cuts through the 80% level.
SNAP Daily Chart (2017 – 2019)
The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high during February 2018's one-day wonder rally and entered an aggressive distribution phase that hit an all-time low in December. Buying pressure since that time has failed to reach the level of the September breakdown, lowering the odds that price action will mount that barrier forcefully in the coming weeks.
Fibonacci grids stretched across selling waves since February 2018 place current action near the .382 retracement of the 10-month downtrend and .618 retracement of the selling wave that started in June. These levels narrowly align with September resistance, establishing a formidable barrier that is likely to generate a pullback or resumption of the long-term downtrend. The big unfilled gap situated between $7.00 and $8.20 looks like a magnetic target in this price structure, raising the odds for a deep slide that traps complacent bulls.
The Bottom Line
Snap stock has gained more than 40% in the past month, lifting into tough resistance that is now likely to generate a multi-week decline.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.