Consider today’s article a public service announcement for anyone who ever doubted the power of an earnings announcement to make or break a trend. Unfortunately for Virgin Galactic (NYSE:SPCE), this season’s quarterly report served as the ultimate buzzkill for a once-promising rally. Read on for why SPCE stock reacted so negatively, and how traders should play it moving forward.
Virgin Galactic shares scored a huge breakout last month that had the potential to launch prices back to February’s lofty heights. The moonshot pulled both the 20-day and 50-day moving averages higher and had the trend looking more healthy than at any time since its first-quarter meltdown.
The fact that the launch emanated from a four-month base made it even more enticing. Long bases are known for launching assets to high places, and SPCE was following the script to a “T.”
Even volume lent a hand to confirm the validity of the breakout. Accumulation signals exploded with three sessions seeing the stock rack up over 50 million shares traded. It wasn’t a small-fry push, but an institutional-driven buying binge.
For chart watchers, the excitement was warranted. SPCE stock was finally breaching resistance zones that had stood tall for months. Their failure signaled an end to the rangebound behavior and the beginning of what could have been a beautiful and long-lasting uptrend.
The Earnings Rug-Pull
In a parallel universe, that may have been the outcome. Unfortunately for all bulls involved, an underwhelming earnings report arrived to kill the rally and douse dreams. Future growth and profit predictions ran face-first into a wall of reality.
I’ll get to the details in a moment, but it’s worth reminding you that it’s not the news that matters, but the reaction to the news. And in this case, it was quite bad.
The day after Virgin’s August 3rd report, SPCE stock nosedived 15%. But it didn’t stop there. The downdraft has continued, virtually uninterrupted since, resulting in a trifecta of bearish reversals.
First, we broke the 20-day moving average. Second, we breached the 50-day. And third, we’ve completely reversed the once-glorious breakout resulting in one heck of a fake-out. All buyers of the said breakout are now sitting on losing positions, and liable to act as overhead resistance.
No matter how you spin it, the market hated the report. Here were two key takeaways to the announcement that likely contributed to the souring sentiment:
- The company released plans to raise $460 million through the sale of approximately 20.5 million shares of additional common stock; and
- The quarterly loss came in at $54 million, translating into a 30 cent loss per share. Analysts were estimating a loss of 28 cents per share.
What Now for SPCE Stock?
With the upside momentum lost, it’s impossible to suggest a long trade here. There simply aren’t any bullish signs to hang our hats on. I wouldn’t rule out an eventual resurrection, but until we see prices break through $21 again, I see little reason for optimism. This is particularly true when considering the many other stocks that have come through earnings season in far better shape.
At the same time, I’m not entirely comfortable suggesting a short trade either. We just completed a roundtrip from the failed breakout, and we’re down 34% from last month’s high. The drop was virtually a straight line lower. Now that we’re back in the middle of the trading range, I see a choppy future. And that’s not one I want to be a part of.
Sometimes the best trade is the one not taken.
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