Snap Inc. (SNAP) stock finally sprung to life in 2020, posting a phenomenal 306% annual return. TikTok's troubles with the Trump administration lit a fire under the stock in August, with young devotees of the Chinese app kicking the tires in case they were forced to abandon ship. That marked a golden opportunity to introduce initiatives that included personalized public profiles and user-accessible advanced analytics.
The stock broke out in October after blowing away third quarter 2020 top- and bottom-line estimates, nearly doubling in price into Dec. 17's all-time high at $54.71. However, it has posted three red weekly bars since that time, warning that the rally has grown "long-in-the-tooth" despite continued positive coverage. This weakness could easily translate into an intermediate correction that offers a buying opportunity at lower price levels.
Fortunately for bulls, the October-into-November lateral consolidation has generated a trading floor in the mid-$40s, where it is closely aligned with 50-day exponential moving average (EMA) support. This is the price level to watch in coming weeks because a sturdy bounce would set the stage for an assault on the December high. However, a breakdown is likely to attract heavy short selling, exposing much greater downside into the Oct. 21 breakaway gap between $29 and $35.
Wall Street consensus on Snap stock has deteriorated due to outsized share price gains, with a "Moderate Buy" rating based upon 24 "Buy" and 7 "Hold" recommendations. One analyst now recommends that shareholders close positions and move to the sidelines. Price targets range from a low of $24 to Goldman's Street-high $70, while the stock is set to open Tuesday's session nearly $7 above the median $42.50 target. This placement indicates that Snap is "fully valued" at this time.
Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business's management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.
Snap Weekly Chart (2017 – 2020)
The company came public at $24.00 in March 2017 and topped out at $29.44 in the following session. The subsequent downtrend sliced through the IPO opening print and kept on going, dropping to an all-time low at $4.82 in December 2018. Buyers returned in 2019, generating a slow but steady uptick that stalled in the upper teens in July. A January 2020 breakout above that level failed, yielding a decline that posted a higher low in March.
A strong recovery wave reached the first quarter high in May, yielding an immediate breakout that reached within three points of the 2017 high in July. It settled at $20 in August and turned higher, breaking out after the blowout earnings report. That impulse stalled in the mid-$40s in October and mounted that barrier a month later, lifting into December's all-time high, ahead of a quiet pullback into year end.
The weekly stochastic oscillator crossed into a sell cycle in the second half of December and is now accelerating through the panel's midpoint. This indicates that bears are in firm control of a decline that could stretch into February. Meanwhile, the monthly indicator remains in a long-term buy cycle, but that will change with another two or three weeks of lower prices. Support in the mid-$40s isn't likely to hold if that commanding time frame enters a sell cycle.
A stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result. It is used to generate overbought and oversold trading signals, utilizing a 0–100 bounded range of values.
The Bottom Line
Snap stock is pulling back in a possible intermediate correction that could test and potentially break support in the mid-$40s.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.