by Profit Scanner | April 29, 2014 9:53 am
After delivering a substantial loss, a weak outlook, and announcing it would raise subscription prices, Pandora (P) shares suffered a a 23% drop in the past two trading days. The charts show there’s likely to be more bloodshed in the weeks ahead for the streaming music provider.
On April 29, Profit Scanner powered by Recognia identified that a fiercely bearish Head and Shoulders Top pattern appeared on Pandora’s chart on volume of nearly 23 million shares, indicating the carnage could continue for the stock.
A bearish Head and Shoulders Top pattern tells traders that Pandora’s price seems to have reached the end of a period of “distribution” at the top of a major uptrend. The stock’s break down through support signals there’s a reversal to a new downtrend in the works. The bearish Head and Shoulders Top is created by three consecutive price rallies that follow a significant uptrend.
The highest high (head) is in the middle, flanked by two lower highs (shoulders) at roughly the same level. Volume is highest as the price makes the first two rallies, then diminishes through the right shoulder. Pandora followed the pattern, as the first of these two rallies can be seen in its chart when the stock rallied first to the $37 area in January 2014 and then approached $40 in February.
After dropping steeply, Pandora made a final gasping climb back up to $30 in mid-April before establishing the bearish Head and Shoulders Top.
Pandora’s Target: From here at the $23 level, Pandora looks to continue dropping until it reaches the pattern’s downside target of $10.00 to $13.00 in 76 trading days. If Pandora hits the most conservative target, it would mean about a 40% haircut in just about three months’ time. It would also put Pandora well below its 2011 IPO price of $16.00.
As Pandora isn’t currently showing any significant support levels (though there is resistance at the $34 mark), short traders could look to sell at current levels. However, a reasonable stop-loss for a short position, as indicated by Profit Scanner, is to buy back to cover if Pandora closes above $26.79.
While Profit Scanner can only provide insight into a stock’s trajectory and doesn’t recommend corresponding options, since this bearish pattern is expected to resolve to the down side in about three months’ time, options traders could initiate a very speculative play on the P Sept $15 Puts, which are showing fairly robust open interest. The puts are currently trading around 55 cents, so it’s a cheap “Vegas money” trade at about $55 a contract; take a small position and only trade with money you can afford to lose, as P is a volatile stock. However, if P drops below the $20 level, those puts should easily double in value well ahead of expiration.
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