Shares of wearable camera company GoPro Inc (NASDAQ:GPRO) rallied meaningfully Monday, breaking GoPro stock out of what is a bullish bigger-picture technical pattern. While one day does not make a trend, active traders and investors interested in GPRO now have well-defined areas of risk to focus around, which is a big help in risk managing any trade.
On the news front it was announced on Monday that GoPro’s president Tony Bates has joined the board of directors of eBay Inc (NASDAQ:EBAY). It is possible that some investors took the news as the beginning of a closer relationship between the companies; so far, that hasn’t been confirmed.
The thing about stocks is that it doesn’t always need a news catalyst to move a stock; sometimes it’s just the buying/selling of a large institutional investor that gets momentum going, which then leads to quicker investors jumping on top of the move. Other times a stock begins to move because someone “knows something,” which then allows investors to use technical analysis as a leading indicator.
GoPro Stock Charts
Looking at the daily chart of GPRO since its initial public offering in June of last year, we see that after an initial post-IPO honeymoon rally, GoPro stock finally topped out in October and began to cascade lower in consistent if not dramatic fashion.
Earlier this month, GPRO completed a full retracement of the entire steep August 2014-October 2014 rally, or about a 60% drop in the value of shares. The entire price action since last October has also taken the shape of what technical analysts refer to as a “falling wedge” pattern, as I highlighted with the two black lines. The nature of the falling wedge pattern is such that when the stock has fallen far enough — say, the rubber band has been stretched too much — and the price range has gotten notably tight, then a higher-probability snap-back move to the upside begins to set up.
This big retracement/drop in price has brought GPRO into a better horizontal support zone, and as a result, the proverbial rubber band may just have been stretched far enough to create a powerful oversold bounce.
On the closer-up chart where I added my favorite near-term moving averages — the 8- and 21-day averages in blue and yellow, respectively — we see that with Monday’s 4.16% rally, GoPro stock has once again overcome both of those moving averages.
Note that GPRO has staged several such rallies above the moving averages already year-to-date, but none of them pushed the stock out of the falling wedge from the above chart, and didn’t come off the oversold levels reached in early March.
Active investors and traders could look to buy GPRO stock at $42.70 or higher for a move into the $46 area. As always, any major bearish reversal and erasing of Monday’s rally would quickly negate the near-term bullish setup.
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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.
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