by Serge Berger | June 5, 2014 8:07 am
Internet radio company Pandora Media (P) had an active trading day Wednesday, with Pandora stock first slipping more than 6% at the open, only to close the day just 40 basis points lower.
The resolution is a favorable one for traders — bulls and bears alike now have a defined area to watch and/or lean against in coming sessions.
On Wednesday, Pandora announced that its listeners in May rose by 1 million, to 77 million. On a year-over-year basis, active listeners rose almost 9%. At the same time, listener hours rose 1.7% in May to more than 1.73 billion hours, though Pandora also said its market share had fallen from 9.28% in April to 9.11%.
The larger concern for investors in Pandora stock, however, was that the antitrust division of the Department of Justice is reviewing documents around songwriter royalties. The outcome of this review could obviously affect the company’s business model.
Bigger-picture, Pandora is in a hot spot given that the shift from music downloads to streaming services has hit the mainstream media, partially due to Apple’s (AAPL) acquisition of Beats earlier this week. Rumors are flying fast and furious as companies adjust to this change in business models. Will Pandora be acquired or acquire other services? Twitter (TWTR), for example was rumored to have eyed Spotify as an acquisition target.
For active investors and traders, Pandora stock has become an interesting spot to play in, but all of the above — the underlying current in the music streaming business — is pivotal to understand.
So are the charts.
The construct of Pandora’s stock chart is at a cross road. The big run-up in 2013 and early 2014 finally came to a halt in early March, after the stock rallied close to 50% in three months, and thus leaving an incredibly steep slope behind on the chart. The steep rally then led to a 45% selloff over the ensuing two months as social media and new Internet stocks got spanked as a group and greedy traders punished for chasing too steep a slope in these names.
Along the way, P stock broke below its 200-day simple moving average and its late 2012 uptrend (black line), and has been consolidating below those two areas for the past month or so.
On the daily chart, the consolidation over the past few weeks has arguably taken the shape of a so-called bear flag pattern, which as the name indicates, has a tendency to resolve to the downside. The fact that this formation is taking place below the 2012 uptrend as well as the 200-day moving average (red line) only adds to its credibility. However, after Wednesday’s intra-day bullish turnaround, this pattern doesn’t trigger until Pandora stock breaks below Wednesday’s intraday lows near $23.10.
For quick traders looking for some sort of follow-through buying in coming days, Wednesday’s lows offer a good stop-loss area to lean against. For the more tactical active traders and investors, an eventual break below $23.10 could offer a short-side opportunity toward the $20 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
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