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 ContextLogic Inc. (NASDAQ: WISH), the American online e-commerce platform that facilitates transactions between sellers and buyers .
Why WISH is trending?
Contextlogic is the parent company of the online marketplace Wish.com. After the company’s lackluster performance in the first months after its IPO, WISH had recently gained support from the WallStreetBets Reddit forum. WISH has now soared 70% since the start of June on extraordinarily high volume, thanks to its meme-stock status.
WISH has slowly distinguished itself in the crowded e-commerce field by democratizing mobile commerce with a discovery-based, personalized, and entertaining platform. Its innovative programs like Wish Local, which allows small, independent stores to upload all of their inventory onto Wish’s website has allowed it to capitalize on the large base of brick-and-mortar merchants.
The company reported a 34% revenue growth in 2020 to $2.5 billion. In May, ContextLogic reported quarterly revenue of $772 million, which beat the estimate of $743.09 million and represented 75% year-over-year growth.
Most of the sellers of products on WISH’s platform are based in China, making products available at astoundingly low prices. A trade-off for shoppers on WISH is the longer delivery time, although this continues to improve.
However, the company also has a reputation for carrying fake products that don’t match their descriptions. The current price surge is also not expected to sustain for the long term, as the pandemic-induced spike in e-commerce activities is expected to subside as things go back to normal. The Reddit-fueled rally may also end abruptly without warning if the traders’ focus shifts to other stocks.
Here’s how to trade WISH now.
WISH Chart
On analysis, the overall trend of WISH seems to be up. There are also multiple bullish indications on the daily chart of WISH.
#1 Falling Wedge Pattern Breakout: The daily chart shows that the stock had recently broken out of a falling wedge pattern. This is marked as pink color dotted lines. Once the stock breaks out from a bullish pattern like the Falling Wedge Pattern, it has the potential to move further up.
#2 Price Above MA: The stock is currently trading above its 50-day SMA, indicating that the bulls are still retaining control.
#3 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.
#4 MACD above Signal Line: The daily chart shows that the MACD line (blue color) is currently above the MACD signal line (orange color). This is a possible bullish setup.
#5 IH&S Pattern: The daily chart shows that the stock has been consolidating in the form of an Inverted Head and Shoulders (IH&S) pattern. This is marked in the chart in purple color. An IH&S pattern is a bullish pattern. A breakout from an IH&S pattern is usually the sign of an upcoming bullish move. Currently, the stock looks poised for a breakout from the IH&S pattern.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the ideal buy level for WISH is above the breakout level of the IH&S pattern. This translates to a price of around $15.50. 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 $20 and $24 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at $12.60. Note that the stop loss is on a closing basis.
Our target potential upside is 29% to 55% in the next 1-4 months.
For a risk of $2.90, our first target reward is $4.50 and the second target reward is $8.50. 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 IH&S pattern 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 a very high volume from the right shoulder of the IH&S 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 WISH if it breaks down from the right shoulder of the IH&S pattern and closes below the price of $9.70. 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 $7 and $5 in the next 3-6 months.
SL: To limit risk, place a stop loss at $11.30. Note that this stop loss is on a closing basis.
Our target potential downside is 29% to 49% in the next 3-6 months.
For a risk of $1.60, our first target reward is $2.70 and the second target reward is $4.70. 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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