Meme trading has hijacked good old homework for investors. The rewards from super-spikes come so fast and so large that they are too tempting to most. Why slave over finding hidden gems when one can ride a Reddit short squeeze to the moon? Skillz (NYSE:SKLZ) stock is not a stranger to mega moves. It’s seen its fair share of whiplash in its short public life.
Last November, SKLZ rocketed 250% and topped at $46 on Feb. 3. Sadly for the bulls, it then collapsed just as fast, losing 75% of its value. Relief came in April with a 70% rally from the lows. The right thing to do then was to fade it, and I wrote an article about that. After any correction, investors holding losses should use pops to fix their trades. Also, those looking to get into it a rebound should make sure they are early enough. The temptation to chase a stock after a long rally is often detrimental.
The current situation on Wall Street is fluid. There is a new breed of traders trying to make their mark on the investing community. In the end, logic will prevail and we will adapt and move on. The fundamentals will continue to matter even though the methods may evolve.
SKLZ Stock Is in Recovery
Sure enough, SKLZ stock reverted to the $12 base – and that would have been the time to buy it. While smart money bought the dip mid-May, smarter money booked profits into $24. That was a pivotal zone that dated back to last December. More often than not, those are resistance areas until the bulls take them out. Now the SKLZ stock chart is showing a believable path to recovery.
Old school buy-and-hold is all but dead for now, especially for new equities like this. Therefore, investors should employ a trader mentality to succeed. SKLZ has support going into $17 per share worthy of an attempt to buy the dip. I favor that more than I did last time, even though the levels are similar. The overall price action is more constructive this time around. The support held twice already and it is setting higher-lows.
A breach of last week’s highs will carry momentum in that direction. Coming at a prior fail from better footing carries more gumption. If at all possible, the bulls should avoid sharp spikes. These incredibly steep recoveries are just bad price action. They compress the bullish energy in a short amount of time. Rebuilding the momentum after they fade is tough.
Value Is Not a Cause for Concern
Fundamentally nothing materially has changed. The stock is still expensive with a price-to-sales ratio over 50. But if the company continues to grow at this rate, the P/S metric will come back in line.
For now, value is not a reason to sell the stock. Investors were fine with its situation until a bearish report broke out in March raising doubts over accounting. So far, it seems like it was more noise than fact. In the end, the company will make an accounting adjustment and move past it.
Eventually, experts will go back to judging SKLZ based on its own merits. Selling a stock because of someone’s opinion of it is ridiculous. Investors now have all the tools they need to do their own research.
There Are Immediate Extrinsic Risk Factors
Just as in my April report, I remind readers that we have extrinsic risks from the indices. We broke records yesterday, so markets are vulnerable to corrections from these nosebleed levels. We are up here primarily because of the biggest stimulus package on the planet. I doubt that we will ever have another relief program larger than this.
This week could be pivotal because there we will find out the FOMC’s decision on that. The Federal Reserve’s efforts infused trillions of extra liquidity for years. Their loose monetary policies have been extreme for way too long. They committed to these policies until 2023, but recent economic activity suggests otherwise. Inflation is rearing its head, so they may need to taper sooner than planned.
The outcome of this week is binary to a degree, so whatever I do should be in small increments. I should take only partial positions even if I absolutely love SKLZ stock. Leaving room to add makes it possible to manage the overall risk. Otherwise, investors would leave absolutely no room for error.
These are times like never before, so we can’t claim to be experts. Almost everything now is a new set of circumstances. This Goldilocks scenario is not going to last forever.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.