We’ve heard about the battle between Snap (NYSE:SNAP) and Facebook (NASDAQ:FB) a million times before. Many believe that Snap comes up with the ideas and FB copies them. Today we will look at why, from an investment purpose, what matters is Snapchat stock against itself.
The $16 area is a major pivot point that is likely to be ongoing resistance. Before you send me hate mail, know that this is not the same as me being bearish. In fact, the bulls have the opportunity to bury this resistance and turn it into an asset going forward.
In May, when the equity markets were falling, SNAP stock laid the foundation for a great 50% rally off the $12 neckline. This is during a period of time when experts in the media were busy selling us on the idea that a recession was imminent. Meanwhile, they missed a bullish setup from a trio of patterns. Snapchat stock had just broken out of a long-term descending channel that started from its IPO. Then at the same time it was also setting a bullish inverse head-and-shoulder pattern. All this while the price action had reached a horizontal contention level dating back to August 2018.
The result of this trifecta was a fantastic rally that filled its potential to $18 perfectly. The positive violent reaction to earnings was a perfect time to book that breakout. Those earnings bursts often exhaust the buyers especially when they come at the tail end of a powerful rally. Tactically, it is best to book the profit and snipe another entry. True to form, SNAP stock fell 30% and almost all the way back to the neckline from which the rally started. But this is normal price action, albeit large in size. But a rally can give back half the distance and remain a viable thesis. The buyers are still in charge as long as SNAP stays above $14.50 per share.
Snapchat Stock’s Picture-Perfect Finish for 2019
While there never are guarantees, if the stock markets don’t correct before year-end then Snapchat stock has the chance at another rally. If the buyers can close above $16 then they can trigger the chain of events that would bring a third touch of the year’s high. And that is the gateway for an even more massive rally to unfold in 2020. Not many experts expect SNAP stock to be over $20, but it is a possible scenario.
Fundamentally, SNAP is not cheap. It still loses money and sells at 18 times sales. Clearly, Wall Street gives it leeway on valuation for the sake of growth. There is no doubt that this is a popular platform especially among young people, but the proof is in the pudding if it will be a viable advertising model that will rival Facebook, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) or even Amazon (NASDAQ:AMZN).
In reality there is enough business to go around for all major social media companies including Snap. The digitization trend is global and irreversible. Moreover, it is catching on exponentially so unless Snapchat’s management flubs again, the stock should be a good trading vehicle. Today’s opportunity is tactical so unless I want to own the share for a long time it is best to set a finite stop-loss to prevent it from becoming an investment.