Shares of Internet radio company Pandora Media (P) tumbled Thursday along with the rest of the stock market. However, P stock has been trading weakly for most of the year, and with Thursday’s selloff, it has sliced below an important multimonth support line.
The result: Pandora shares now have even more downside.
Competition for online streaming music services such as what Pandora offers has undoubtedly increased over the past couple of years. Big-name tech companies like Google (GOOG), Apple (AAPL) and Microsoft (MSFT) have all ventured into this space to add to their ecosystems. Between Google Music, Apple Radio and iTunes, Xbox Music and independent services like Spotify, consumers now have a variety of streaming music services to choose from, which has weighted on shares of Pandora.
While the occasional rumor of activist involvement or an outright buyout of Pandora comes around, thus far none of them have come true, and the stock price keeps slipping. Of course, maybe buyers will become more interested as Pandora’s stock price weakens, but that’s another story.
On Tuesday, Topeka Capital Markets initiated coverage on P stock with a “hold” rating but a price target of $30 — at the time, some 20% higher. The analyst discussed the increasing competition as well as concerns over “escalating content costs” that the company could face as of 2016.
Pandora Stock Charts
Looking at the price action of P stock on the multiyear weekly chart stretching back to late 2012, note that while the stock kept rising into early March of this year, momentum — as represented by the relative strength index (RSI) — topped out in September. Once the stock peaked, it began to slide a steep slope, as typically happens to momentum stocks that overstay their welcome.
By mid-April, Pandora stock broke below the late 2012 support line, which it retested from below in early July, before resuming lower. With Thursday’s selloff, the stock has also broken below the lower support line. A weekly close below this line would be particularly bearish through a technical lens.
On the daily chart, note that the price action in P stock over the past few months can also be looked at as a narrowing wedge, or arguably a descending triangle, where it oscillated back and forth. Earlier this week, Pandora marginally broke below the support line, and with the help of Thursday’s push, it did so in a more pronounced way, thus clearly showing broken support.
Active investors and traders could consider shorting Pandora stock at $25 or lower with a price target near $22.
For risk management purposes, a move back above $26.50 would negate the current setup. Alternatively, one could purchase Dec $25 strike puts.
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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.
