A little less than a month ago yours truly took a bigger-picture look at Momo (NASDAQ:MOMO), ultimately determining the company and the stock were winners. Since then, Momo stock has fallen 27%, and is knocking on the door of even lower lows thanks to a sweeping change in how traders perceive the current market environment. Talk about unlucky timing!
And yet, while I would never advocate attempting to catch a falling knife, I will gladly pass along a cool-headed reality that’s been lost in the recent marketwide drubbing. That is, Momo is (still) growing its top and bottom line at an impressive clip, and once the dust settles, the market will once again reflect its plausible future.
The waiting is the hardest part.
Right Stock, Wrong Time
It’s not all that easy to pin down exactly what Momo is. It’s not unfair to compare it to Facebook (NASDAQ:FB) or Weibo (NASDAQ:WB), which has earned the unofficial title “the Twitter of China.” But, it’s also undeniably a dating app, and as such is just as legitimately compared to Match Group (NASDAQ:MTCH), which operates Match.com and Tinder.
Whatever Momo is though, its chemistry works. Its second quarter per-share profit doubled on a year-over-year basis, supported by revenue growth of 58%. That’s been the norm of late, and the growth trend is projected to continue for the foreseeable future… the point I was making a month ago.
That strength wasn’t enough to stave off a wave of selling. As was noted, Momo stock has fallen by about a third just in the past four weeks. But, before anyone embraces the idea of going on a bargain hunt and scooping up shares on the cheap, you may want to take a closer look at what the chart’s doing, and what it’s about to do. The bears may not be done with it yet.
To be fair, the recent rout of Momo stock has more to do with the market environment than it has to do with Momo specifically. On the other hand, the reason doesn’t entirely matter. Traders are clearly unplugged from any semblance of fundamentals right now, controlled by fear, greed and headlines. Ignore them at your own peril.
The good news is, when sentiment takes over a chart, it actually becomes easier to handicap a stock; irrational behavior leads to rather predictable outcomes.
To that end, take note of two huge technical clues on the weekly chart of the Momo stock price. The first of the two is that as of this week, MOMO shares have broken under the rising support line (red, dashed) that rekindled the rally back in August.
The second noteworthy hint to bear in mind is the fact that Momo stock is just one bad day away from breaking below a key floor at $34.83 (yellow, dashed).
There is a bright spot on this otherwise-dire chart. That is, as rough as the past three weeks have been, the volume behind the selloff has been relatively light. It’s a subtle hint that this weakness may not reflect the prevailing opinion of Momo right now. It may also simply indicate general disinterest, but for a well-watched name like Momo, disinterest isn’t the likely explanation.
If the support level around $35 fails to hold the stock up, there’s another support area mustering around $22.50. That’s where MOMO hit a low late last year, but it’s also where the lower edge of the stock’s ultimate trading range (framed in white, dashed lines) will soon be.
That potential floor only comes into play, however, if-and-when the support at $34.83 fails. That may well never happen.
Bottom Line on Momo Stock
Just to alleviate any possible lingering confusion, now’s not the time to step into Momo stock in anticipation of a firm floor being made around $35, nor is this a reason to short MOMO shares on the chance the stock won’t stop falling right where it is.
The stock’s at a fork in the road, and traders are currently paused as they weigh their decision. The broad market backdrop is playing a huge role in that decision-making process. The smart-money is waiting to see what happens next, recognizing the scope of the potential move once the bulls or the bears finally show their cards.
In both cases though, know that Momo is ultimately a long-term winner. A steep selloff would be a sweet buying opportunity, and the $22.50 area would make for an incredible entry point.
Just keep it all in perspective. Mania may win in the short term, but in the long run, fundamentals always win.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.