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 recently started a new weekly series on what we’re calling “the trending stock of the week” —stocks that are being featured heavily in the news right now.
This week’s stock pick is Airbnb Inc. (NASDAQ: ABNB), the online marketplace for lodging, primarily homestays for vacation rentals, and tourism activities.
Why ABNB is trending?
The vacation rental platform made its Nasdaq debut last December at $68. The IPO was the culmination of a stunning recovery in Airbnb’s fortunes after the firm’s business was heavily damaged by the COVID-19 pandemic.
After surging to nearly $175, the stock steadily pulled back, losing its gains from February. The stock dropped further after an announcement by Airbnb on March 4, which said that the company will raise some cash by selling $2 billion in convertible senior notes. Some investors sold their shares over this news due to the concern that the notes would eventually be converted into equity in Airbnb, and potentially dilute existing shares.
ABNB also faces increasing competition from the likes of Alphabet (NASDAQ: GOOGL), Expedia, Booking Holdings, Sabre, and other travel companies which have built travel ecosystems and has the capability to serve as one-stop shops for all travel needs including car rentals, airfares, and side trips.
However, there are also clear tailwinds for the stock. In the U.S., eligible individuals had started receiving their $1400 checks under the Biden administration’s $1.9 trillion stimulus plan. A part of that money is anticipated to go to discretionary spending like travel, eating out, and movie watching. Many travelers are anticipated to prefer to stay in Airbnb properties over those of big hotel chains.
For the fourth quarter, the company posted $859 million in revenue, beating the analyst projection of $748 million. Airbnb also boasts growing institutional support.
The availability of multiple coronavirus vaccines is expected to spur growth in the travel industry, with ABNB standing to benefit significantly due to its resilience and inherent adaptability. In fact, the stock was picked as the Best Value Stock to Buy Right Now.
Here’s how to trade ABNB now.
On analysis, the overall trend of ABNB seems to be up. There are also multiple bullish indications on the daily chart of ABNB.
#1 Uptrend Unbroken: The daily chart shows that Airbnb’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. The stock had taken support near this trendline multiple times before bouncing higher again.
#2 Price Above MA: The stock is currently above the 50-day SMA, indicating that the bulls are currently in control.
#3 Bullish ADX and DI: The ADX indicator shows bullishness because (+DI) is greater than (-DI), and ADX has started to move up from below (-DI) and (+DI).
#4 Bullish Aroon: The value of Aroon Up (orange line) is above 70 while Aroon Down (blue line) is below 30 in the daily chart. This indicates possible bullishness.
#5 Bullish RSI: The RSI is currently above 50 and moving higher, indicating possible bullishness.
However, the stock is also forming a head and shoulders pattern (orange color) according to the charts. This is a possible bearish sign.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the ideal buy level for ABMB is above the high of the right shoulder of the H&S pattern. This translates to a price of around $216. This is marked as a green color dotted line in the daily chart.
Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.
TP: Our target prices are $230 and $250 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at $208. Note that the stop loss is on a closing basis.
Our target potential upside is 6% to 16% in the next 1-4 months.
For a risk of $8.00, our first target reward is $14.00 and the second target reward is $34.00. This is a nearly 1:2 and 1:4 risk-reward trade.
In other words, this trade offers 2x to 4x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend if it breaks down from the near-term supports with high volume. The sell-off of the stock could also be triggered 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 head and shoulder pattern, 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 ABNB if it breaks down from the H&S pattern and closes below the price of $179.00. 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 $160 and $150 in the next 3-6 months.
SL: To limit risk, place a stop loss at $189.00. Note that this stop loss is on a closing basis.
Our target potential downside is 11% to 16% in the next 3-6 months.
For a risk of $10.00, our first target reward is $19.00 and the second target reward is $29.00. 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.
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.
— Trades of the Day Research Team