Shares of action sports camera maker GoPro (GPRO) saw another great rally on Monday on the back of an analyst upgrade and new product offerings, and despite negative comments from Barron’s over the weekend.
While GoPro still has to prove that the projected growth rates are reasonable, active investors and traders can find opportunities among the exuberance … but blindly chasing the stock higher would be a poor strategy.
Over the weekend, Barron’s “The Trader” column highlighted some of the bubbly valuation metrics that could eventually weigh on the shares. But this was overlooked Monday when GoPro unveiled its new HERO4 camera and Piper Jaffray raised its price target on GPRO stock from $60 to $90, keeping the “overweight” rating.
Many doubters of the “camera on a stick” are undoubtedly left scratching their heads, but what GPRO stock is currently going through is a little thing called “price discovery.”
You see, shares of GoPro have only been trading in the public markets for 14 weeks, so the stock is still very much in its honeymoon phase. And you don’t have to look far to see that this honeymoon phase exists in many stocks — Facebook (FB) and Twitter (TWTR) did the same, and Alibaba (BABA) is in the midst of such a period.
Of course, just like with humans, not all honeymoons go equally well. Facebook, for example, saw a rocky few months before lifting higher, while Twitter was off to the races right out of the gate before reality settled in and the stock came crashing back down.
In my experience, it takes anywhere from three to six months before a new IPO stock finds some sort of reliable rhythm as the initial emotions have run their course, price discovery has taken place and (for the chartists) some technical reference levels have established themselves.
GPRO Stock Charts
On the weekly chart, note that after breaking past lateral resistance in late August, GPRO stock has since rallied 110% in a vertical fashion. I wouldn’t chase GoPro for now, but simple, round upside targets around $90 and $100 are levels to watch for a potential pause or medium-term top in GPRO.
On the daily chart, we see that GPRO stock in mid-September formed a nice bullish flag consolidation pattern that has meaningfully resolved higher during the past five trading days. Because of the stock’s young trading history, more near-term moving averages such as the 8- and 21-day (blue and yellow lines, respectively) have to be used as reference areas.
After Monday’s nearly 11% surge, GPRO stock is now again well extended above its 21-day moving average, meaning that you’d be wise not to chase GoPro higher.
Instead, active investors and traders could wait for GPRO stock to settle into its next consolidation phase, from which it will either prepare for a next push higher or mean-revert lower.
Either way, patience is suggested.
Like what you see? Sign up for our daily Beat the Bell e-letter and get investment advice delivered to your inbox every morning!
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.