It is no secret that stocks are prone to sudden moves in either direction. This could be triggered by economic data, geopolitical events, stock-specific news, or market sentiment.
Trading such volatile stocks are usually considered a high-risk-high-reward venture. Many traders opt to stay out of the trade rather than risk a loss. However, careful analysis of the charts could help you to enter at the right levels, thereby limiting risk to an extent.
With this in mind, we have started a new weekly series on the trending stock of the week —stocks that are featured heavily in the news.
This week’s stock pick is Snap Inc. (NYSE: SNAP), the provider of social media platform Snapchat, as well as other technological products and services like Spectacles, and Bitmoji.
Why is SNAP trending?
Snap Inc. recently announced the launch of 15 augmented reality products for businesses, that includes ones enabling Snapchat users to virtually try on products like shoes or nail polish. TikTok’s troubles with the Trump administration had already resulted in the increased popularity of Snapchat since August 2020, and the company had come up with new initiatives like personalized public profiles and user-accessible advanced analytics to retain the users.
Snap Inc. is expected to report earnings on 02/04/2021 after market close. For Q3, the company had reported highly encouraging results, with the revenue increasing 52% year-over-year to $679 million and the operating cash flow improving 28% year-over-year to $(55) million.
However, the firm’s expenses have remained well above revenue (Total Costs and Expenses were 125% of revenue for Q3, 2020) and the company’s daily active users (DAUs) growth came in from its least profitable markets. The stock also has headwinds like the competitors continually copying Snap’s features – the Instagram stories and Twitter adding a “disappearing-content” feature, called Fleets.
Here’s how to trade SNAP right now.
SNAP Chart
On analysis of the daily chart of SNAP, the stock seems to be consolidating currently. There are also multiple bullish indications on the daily chart.
Daily Chart – SNAP Inc – Buy Levels and Sell Level
#1 Unbroken Uptrend: The daily chart shows that the stock’s uptrend is unbroken, as it has been forming higher highs and higher lows for the past several months. This uptrend line has been marked as a purple color line.
#2 Price Above MAs: The stock is currently above its 50-day and 200-day SMA, indicating that the bulls are still in control.
#3 Bullish RSI: The daily chart shows that the Relative Strength Index is currently above 50 and moving higher, indicating the strength of the current upmove.
#4 Bullish Stoch: The daily chart shows that the %K line (blue color) of the stochastic is currently above the %D (orange color) line. This is a possible bullish sign.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the buy level for SNAP is in two scenarios. These are marked as green color dotted lines in the daily chart.
- Buy Level #1: You can purchase the shares of SNAP if it trades above the nearest resistance level, which translates to a price of $57.00.
- Buy Level #2: You can purchase the shares of SNAP if it corrects to the previous gap support level of $35.00.
Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.
TP: Our target prices for various buy levels are as follows
- The target prices for Buy Level #1 ($57.00) are $65 and $70 in the next 3 to 6 months.
- The target prices for Buy Level #2 ($35.00) are $48 and $55 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at the following levels.
- The stop loss for Buy Level #1 ($57.00) is $52.00.
- The stop loss for Buy Level #2 ($35.00) is $27.00.
Note that the stop loss is on a closing basis.
Target Upside: Our target potential upside is 14% to 57% in the next 3-6 months.
- Entry at Buy Level #1($57.00): For a risk of $5.00, our first target reward is $8.00 and the second target reward is $13.00. This is a nearly 1:2 and 1:3 risk-reward trade.
- Entry at Buy Level #2 ($35.00): For a risk of $8.00, our first target reward is $13.00 and the second target reward is $20.00. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers 2x to 3x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.
Recommended Bearish Trade (based on the chart)
In case the stock breaks down with very high volume from the trendline support and closes below the previous support area, it could point to an upcoming short-term correction. In that case, below are the entry levels, stop loss levels, and target prices.
Sell Level: You can take short positions on SNAP if it closes below the price of around $48.00. This sell level is marked as a red color dotted line in the chart.
Important Note: Make sure that you only enter the trade once the daily close is below the recommended price level.
TP: Our target prices are $42 and $36 in the next 3-6 months.
SL: To limit risk, place a stop loss at $51.80. Note that this stop loss is on a closing basis.
Our target potential downside is 13% to 25% in the next 3-6 months.
For a risk of $3.80, our first target reward is $6.00 and the second target reward is $12.00. This is a nearly 1:2 and 1:3 risk-reward trade
In other words, this trade offers nearly 2x to 3x rewards compared to the risks.
Note: Those with a higher risk appetite can take short positions on SNAP below yesterday’s close, at around $53.00 with a stop loss of $55.80, for target prices of $42 and $36, translating to 1:2 and 1:4 risk-reward trade.
Risks to Consider: The stock may reverse its overall trend if it breaks upwards with high volume. The breakout of the stock could be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.
Happy Trading!
Trades of the Day Research Team
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