Shares of GoPro Inc (NASDAQ:GPRO) have dropped nearly 50% since mid-August as the spanking of momentum stocks continues. GPRO stock and a few other momentum darlings held up the broader market into mid-August, but once those stocks began sliding the entire market caved and led to a big volatility spike.
The selling in GoPro stock, however, increasingly looks to be overdone, and a good-sized oversold bounce if not bottom-building could soon take place.
The thing with momentum stocks like GPRO is that once they fall out of favor with the so called momentum-chasing crowd, which are inherently weak hands, then the selling in the stocks quickly accelerates.
In other words, active investors dabbling in momentum names like GPRO stock or Netflix, Inc. (NASDAQ:NFLX) better know what they are getting themselves into from a risk management perspective — and they should learn to cut bait once certain near- to medium-term reference lines get broken.
GPRO Stock Charts
The first chart below stretches back to the initial public offering date of GPRO stock in the summer of 2014. We can see that after an initial strong rally into October 2014, the GoPro stock peaked and has been trending lower since.
In August, GoPro shares made an important lower high versus their 2014 highs, and the most recent selloff has since pushed the stock marginally below its March 2015 lows. From a momentum perspective, GPRO stock is well oversold, with the MACD oscillator on the weekly chart signaling so.
Moving over to the daily chart of GPRO stock, we see that the 50% drop since mid-August now leaves the stock notably below its yellow 21-day and blue eight-day moving averages. Furthermore, the Relative Strength Index has reached all-time oversold readings and just represents the strongly trending sell-off since August.
While active investors and traders may find it attractive to step into GPRO stock here, it is vital to approach this with appropriate risk management, as the stock is still very much in a downtrend. Considering that trying to catch the proverbial falling knife is not a high-probability strategy, what I would like to see take place first in GPRO stock is capitulation selling and a bullish reversal that clearly shows the bears having run out of growl.
With Wednesday’s 10% drop, which came on good volume and dropped below horizontal support from the above chart, maybe GoPro is finally showing signs of capitulation.
Active investors could look to buy the stock upon the next bullish reversal day and play it to the upside with a first price target around the $41 area.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
