Why a Cratered Virgin Galactic Stock May Have More Downside Risk

Virgin Galactic (NYSE:SPCE) shares have crashed after a moonshot rally to start 2021. But what are the chances for a second launch? Or is there a more durable manned mission for SPCE stock investors to explore? Let’s take a look at market conditions off and on the price chart, then offer a risk-adjusted determination aligned with that information.

Virgin Galactic (SPCE) billboard on the New York Stock Exchange, across from the Fearless Girl statue. aerospace stocks
Source: Tun Pichitanon / Shutterstock.com

To boldly go where no man has gone before, or rather no prior SPCE investors. In early January and as a beneficiary of the GameStop (NYSE:GME) short-squeeze meme trade, shares of Sir Richard Branson’s space tourism outfit rocketed higher by nearly 150% in less than three weeks to all-time-highs. Heady short interest at the time in excess of 70% of the stock’s float certainly played a hand in the spectacular rally. Yet, as with its well-shorted peers though, the ride up in SPCE stock didn’t last.

From GameStop to AMC (NYSE:AMC), Blackberry (NYSE:BB), Koss Inc. (NASDAQ:KOSS) and others, SPCE shares plunged nearly as fast. And in less than four trading weeks Virgin Galactic was back on the launch pad with some obvious wear and tear. So, what exactly happened?

The Short Story

Vastly reduced short-interest fuel from burned and battered bears covering on the way up is one obvious choice for SPCE’s steep stock correction of 62%. Today, the amount of stock being sold short stands at a comparatively meager 15%. The fact is the once sky-high statistic appears to have shed over 85% on the ride up.

According to MarketBeat, the percentage of SPCE shares being shorted was down to 10% of the stock’s float near its early February peak valuation. But Virgin has another threat which it can’t simply shake off.

To be fair, Virgin Galactic’s stock correction of the past couple months has likely been helped by testing challenges in the New Mexico desert, which persist to this day. But the other drag on SPCE shares and possibly more lethal longer-term is another starship attempting to boldly go into Virgin’s extraterrestrial turf.

Competition from Tesla (NASDAQ:TSLA) CEO Elon Musk’s SpaceX venture appears to have assisted with the cratering share price in SPCE. SpaceX is currently working on prototype, vertical-take-off and landing or VTOL tests for its spacecraft called Starship.

If successful, Starship will be the world’s biggest vessel with those capabilities. That could severely impact SPCE’s mission. There are real-world constraints of flying just a half dozen paying customers for a very pricey few minutes of weightless flight time. The thing is, SpaceX’s Starship would be able to fly 100 tourists for once-in-a-lifetime extraterrestrial journeys that could theoretically last weeks.

Bottom line, betting against Elon has consistently proven a losing business proposition. And rather than worrying about the size of SPCE’s bearish passengers on any given day, bullish investors may be increasingly prone to permanently aborting that mission altogether.

SPCE Stock Weekly Price Chart

Virgin Galactic (SPCE) weekly triangle holding pattern looking at risk of bearish failure

Source: Charts by TradingView

I’ll be the first to admit, it wasn’t long ago the technical visuals on SPCE stock had my interest as a name to buy as shares carved out a smaller triangle pattern. Combined with Virgin finding support off the 62% retracement level tied to its November 2019 all-time-low and challenging the stock’s launch area out of a larger triangle prior to this year’s massive rally, SPCE was on the radar for purchasing.

But an actual SPCE stock buy decision remains on hold. It may also be permanently disabled.

A detailed wait-and-see approach based on a breakout above pattern resistance near $33.50 and backed by a bullish stochastics crossover hasn’t occurred. What’s more, positioning in SPCE is now favoring a nearby bearish initiation. This is based on what we’re seeing off and on the price chart.

With the secondary indicator already bearishly crossed, I’d look to gain short exposure as shares lose the 62% level, as well as triangle support if SPCE sinks below last week’s hammer-like doji candlestick. From there, a bearish leaning May $26/$22/$18 put butterfly combination that’s profitably centered near deeper zone support of $17.50 to about $21.50 looks like a good way to suit up.

On the date of publication, Chris Tyler does not hold, directly or indirectly,  any positions in securities mentioned in this article.

Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100%  the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

Article printed from InvestorPlace Media, https://investorplace.com/2021/04/why-a-cratered-virgin-galactic-stock-may-have-more-downside-risk/.

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