On Feb. 25 I wrote an article suggesting buying Snap (NYSE:SNAP) stock. Since then it rallied 28%, so the trade paid well. But like all good things, these gains have to come to an end. So today I am suggesting that it may be time to take a break from it.
Before you send me hate mail, this is not the same as dissing the company or its prospects. In fact most of my write ups and trades on Snap stock were from the bullish side. Today’s opinion is purely based on the technical opportunity or lack there of that could be in front of it.
The Situation for SNAP Stock
First let me share my current macroeconomic opinion. I believe that the case for more upside is stronger than the downside case for equities. Yet, experts in the media insist on calling tops. Most of the rhetoric is bearish in the sense that they expect a pullback of sorts — and for no particular reason.
I’ve learned over the years that enough of them squawk about it could make it a self fulfilling prophecy. In which case and if they are successful at causing a mini correction, it is the most recent greens that traders shed first. And therein lies the threat to SNAP stock.
This is a stock that has soared this year. SNAP is up 123% which is about ten times that of the S&P 500. Needless to say that if the markets sell off this is an extreme case of the LIFO — Last profits In would be First ones Out. Those who have been on board of this meteoric rise are the proverbial weak hands. They sell first then maybe they ask questions.
So what’s the problem that I see now? Technically there are two upside opportunities that could lie ahead for the stock, but until they pan out, they are potential resistances.
The first is from overhead supply. SNAP here is coming back into a prior ledge from which the stock fell last August. Now that it’s back at it again, the bulls and bears will fight it out again since neither of them want to lose it.
The second potential technical pitfall is one concerning the trend lines. Since its initial public offering, Snap stock has been trading in a descending channel of lower highs and lower lows. Yes, it has been on a great run of late but it has yet to break out of the descending lower-high trend line.
Each of these circumstances usually present a problem but combine them and they present a potential wall to this rally.
Again, this is not the same as saying short the stock. If I am long SNAP with profits, ideally I would book some profits to continue playing with house money. On the other hand, if I am looking to enter a long position in SNAP, I would delay it until it closes at least above $14.50.
For those who can use options, there are dozens of clever, low-risk ways of staying long SNAP or hedging. I can buy puts that would cover me for a few weeks. Or I can sell covered calls to generate synthetic dividends for a small buffer. Or I can do both so I’d be protected for free.
Simply put, this is not an obvious place to start or stay bullish SNAP stock. The short-to-mid-term downside risks seem more realistic than more immediate upside. And for full transparency, here is the link to my recent bullish opinion that got us to this point.
To this point I remind us that yes, year-to-date SNAP is up 123% and outperforming the S&P, but if we look back to a full year it’s down 13% whereas the S&P is up 11%.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.