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 Peloton Interactive Inc. (NASDAQ: PTON), the exercise equipment and media company based in New York City.
Why is PTON trending?
The price of the maker of connected home-exercise machines surged by more than 650% in the past year due to the pandemic-driven demand for home fitness equipment.
With the pandemic resulting in widespread lockdowns and the shift to telecommuting, people leaned towards setting up home gyms. PTON took advantage of this new trend by not just selling its exercise bike and treadmill but also offering connected fitness subscriptions to work out in tandem with trainers.
The company also stormed into the commercial fitness market with the $420 million acquisition of Precor, a global commercial fitness equipment provider, last December. This transaction not only added around 625,000 square feet of additional manufacturing in the U.S. but also opened up the business-to-business (B2B) market for the company.
The company has also been making steady expansion into other regions, like Australia. PTON had announced that physical retail showrooms will be built in key Australian cities like Sydney and Melbourne, in time for the official launch of the brand in the second half of 2021.
However, the company also had its share of controversy in its short history. In March 2019, the company was sued by several members of the National Music Publishers Association for using copyrighted music in its streamed videos without the proper license. Recently, the company ran into a dispute with the Consumer Product Safety Commission (CPSC) over potential safety problems with the Peloton Tread+, a $4,300 exercise machine.
CPSC warned about the danger of the Peloton Tread+ exercise machine after multiple incidents of small children and a pet being injured beneath the machines. Peloton itself had released news of a child’s death by a Peloton Tread+ in March. However, the company had refuted CPSC’s claims by stating that there was no reason to stop using the Tread+, as long as all warnings and safety instructions were followed.
These controversies had resulted in the stock trending down, declining by 36% from the start of 2021.
However, despite these short-term tailwinds, PTON seems to have multiple catalysts in place and strong financial and operating metrics. Here’s how to trade PTON now.
PTON Chart
On analysis, the overall trend of PTON seems to be up. There are also multiple bullish indications on the daily chart of PTON.
Daily Chart – PTON
#1 Uptrend Unbroken: The daily chart shows that 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 pink color line. The stock had taken support near this trendline multiple times before bouncing higher again. These are shown as orange color ellipses in the chart.
#2 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.
#3 Oversold RSI: The RSI is currently near oversold levels, indicating that an upmove may be imminent.
However, the stock seems to be forming a head and shoulders pattern, which is shown in purple color in the daily chart. This is a bearish chart pattern and could point to a possible short-term decline in the prices.
Here are two ways to trade the stock.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the ideal buy level for PTON is above the high of the right shoulder of the Head and Shoulders pattern. This translates to a price of around $132.00. 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 $165 and $190 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at $115.00. Note that the stop loss is on a closing basis.
Our target potential upside is 25% to 44% in the next 1-4 months.
For a risk of $17.00, our first target reward is $33.00 and the second target reward is $58.00. 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 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 PTON if it breaks down from the H&S pattern and closes below the price of $97.00. 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 $60 and $50 in the next 3-6 months.
SL: To limit risk, place a stop loss at $114.00. Note that this stop loss is on a closing basis.
Our target potential downside is 38% to 49% in the next 3-6 months.
For a risk of $17.00, our first target reward is $37.00 and the second target reward is $47.00. 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.
Happy Trading!
Trades of the Day Research Team
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