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How to Trade the Snap Inc Oversold Bounce

Is SNAP stock a good buy right now? Absolutely not. But you don't have to own Snap Inc shares to profit from the coming oversold bounce.

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When we last looked at Snap Inc (NYSE:SNAP) in mid-October, I talked about the company’s issues with monetizing its user base. You see, Snapchat is quite popular with teens — more popular than even Facebook Inc (NASDAQ:FB) and its Snapchat clone Instagram. The problem is that teens don’t have a lot of disposable income, and, quite often, neither do their parents.

SNAP Inc: How to Trade the Snap Inc Oversold Bounce
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Back in October, I recommended a Nov $12/$13 bear put spread to take advantage of weakness in SNAP stock — weakness that would appear after the company reported earnings in November when this monetization issue would rear its ugly head. Hopefully you didn’t let that little pop to the $16 area shake you out of your position. Even more hopefully, you got a better entry price on the trade because of it.

SNAP stock
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The potential return on the Nov $12/$13 bear put spread was roughly 200% if SNAP closed below $12 when November options expired. They expire this Friday. Taking my entry price of 25 cents, or $25 per pair of contracts, you can (and likely should) close that trade out right now for a more than 100% gain.

Now, I haven’t suddenly turned bullish on Snapchat stock. However, the shares do have some short-term upside ahead of them as the broader market trends higher into the end of the year. It’s a seasonality thing.

What’s more, SNAP stock is awfully close to oversold levels and is sure to attract a few bargain hunters. Regardless of how bad Snap’s earnings were, there are always more than a few bulls looking to bet on a short-term bounce.

In fact, that’s where I find myself at this point when looking at SNAP’s near-term prospects. I still don’t like the company, but SNAP stock has room to drift higher before it hits any significant resistance.

Technically speaking, that resistance lies near $14, with SNAP stock’s 20-day and 50-day moving averages quickly descending into the region. That’s a considerable amount of near-term upside before Snapchat stock reverses course once again.

Meanwhile, SNAP’s sentiment backdrop reveals a wealth of pessimism. No fewer than five brokerage firms downgraded SNAP stock following its quarterly earnings report, with Morgan Stanley even calling out Snapchat’s inability to monetize its user base.

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Article printed from InvestorPlace Media,

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