Bottom-fishers in Snap Inc (NYSE:SNAP) have finally tasted their share of the good life. The beaten-down social media stock just cobbled together an impressive 36% rebound that sent short sellers scurrying for cover. But I have a message for any SNAP stock bulls who are taking victory laps. The time of your comeuppance is nigh at hand.
And don’t think I’m just trying to spoil the fun for any tactical traders that scored solid profits over the past two weeks. Quite the contrary, I’m merely pointing out that storm clouds are gathering. That way, if a wicked-witch-worthy tornado strikes, they can ring the register before losing their dough.
After all, I recently highlighted Snap’s bottoming attempt and suggested a bullish trade idea myself. Let’s take a look at a pair of price charts to highlight why I think caution is now warranted.
Oh, SNAP – the Rally Is Faltering
My typical analysis of the weekly time frame will be cut short. Since Snap Inc only just burst onto the public scene in March of this year, we have a mere five months of data to dive into. And while that may be plenty for trends to form on the daily chart, the weekly leaves much to be desired. We’ve only just formed enough weekly candles to create a 20-period moving average. The biggest benefit to bothering with the inclusion of SNAP’s larger time frame is it clearly shows the depth of its descent, the strength of its downtrend.
For all its fury, the rally over the past two weeks remains a mild pop at this stage. The best thing bulls have going for them right now is last week’s bullish engulfing candle formation that saw the biggest volume since the IPO. A second positive is that SNAP has little overhead resistance until $17, so if buyers want to press their advantage, the stock has room to run on the weekly.
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The reasons for caution are better seen on the daily. For starters, we have the magnitude of the recent rise. Trough-to-peak SNAP saw a 36% surge, which is a big move even for volatility-laced, momentum maven. Just look at the Stochastics indicator, which is registering its highest reading since, well, ever.
And then, there’s the 50-day moving average, which prices tested this morning. In my previous article (linked above), I used this moving average as the target for SNAP’s rebound. Well, target achieved.
Based on Thursday’s quasi-bearish engulfing candle it appears I wasn’t the only one eyeing this average as a logical area for profit-taking.
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To be fair, the volume accompanying yesterday’s rollover was quite low, so the bearish reversal certainly wasn’t as potent as it could have been.
SNAP Stock: The Trade Moving Forward
If you’re a short-term trader that captured a portion of this rally, I suggest tightening up your stops at a minimum. And if you’re a bull looking to enter SNAP now, I have two things to say.
First, you’re a day late and a dollar short. Entering now, after it’s already up some 30% plus is a terrible entry. Wait to see if we pull back a few days and form a higher pivot low, then pull the trigger.
Second, the risk-reward for a bull trade here is terrible.
If anything, spectators should consider bearish SNAP plays here. Here are two strategies to consider, one aggressive and one conservative.
The Aggressive Bet
Buy the Oct $15 puts for $1.50. Exit if the SNAP stock breaks above Thursday’s high ($15.34) to minimize your loss.
The Conservative Bet
Sell the Oct $17 call for 46 cents. Consider this a wager that the stock will remain below $17 for the next two months.
I suggest taking profits on either trade if SNAP falls back toward $13.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
