Snap (NYSE:SNAP) stock has had a great week so far. It’s up 30% off the May dip in spite of this Monday’s tech wreck. The week started with a FANGgeddon where stocks like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and FB (NASDAQ:FB) fell more than 6%.
Snap held up better than the FANG gang and spiked 10% on turnaround Tuesday. It also held its own on Wednesday. Year-to-date, the stock is up 145%, so clearly Wall Street is loving what they see in SNAP this year.
This is a massive reversal of fortune from how it traded last year all the way down to $5 per share. Often, extremes are wrong and markets have their way to correct them by migrating back to the mean. Somewhere in the middle almost always lies the truth. If that’s the case then SNAP stock should be closer to $17 per share.
But before you label me a perma-bull on SNAP, I can assure that I am not. I don’t like their fundamentals, but for this trade I set my feelings aside and focus on the facts.
Case in point — I shared two trade setups on SNAP in April. The first was to short it and the second was to buy the dip. They both were profitable.
Today’s Idea in SNAP Stock
Today’s trade setup is purely based on the technical potential that still exist in Snapchat stock. But first let’s get the fundamentals out of the way. This is an expensive stock, as it still loses money and sells at 15 times sales. Clearly the onus is on management to show that they can actually deliver on their promises in the long term.
The opportunity today is independent of these fundamentals. This is a case where I see multiple patterns from different time frames coming together in one area. The result is the start of this huge rally. If I am correct, then the move should target $20 per share. I know this sounds ridiculous, but sometimes the charts provide us clarity. They show us what’s possible regardless of our feelings.
Luckily, this is a low-ticket stock, so the actual dollars at risk are not huge. This is a tactical trade, so I can buy the shares and set a tight stop below to limit the damage if I am wrong. There are two short-term pivot zones at $12.20 and $11.50 per share.
Furthermore those who know options can use dozens of strategies to capture this potential rally. These are usually cheaper and deliver a bigger bang for the buck if the move happens.
For example, I can sell a bull put spread below current levels so I don’t even need a rally to profit. Or I can buy a cheap July call or spread. Either way, it will be a small risk for a substantial profit.
Actually doing both makes it a free trade. Because the net results is a credit. So any premium I recover from selling the calls would be incremental profits. The only way I could lose using these option trades would be if SNAP stock falls below $10.
It is important to note that we still have extremely high geopolitical risk. We are in full-blown headline trading mode, so surprise bombshells from politicians can ruin the best of setups. I make sure to size my risk accordingly.
But in the absence of headlines, the macroeconomic condition still favor the bullish thesis. In other words, if we have no headlines, most likely the indices will be rising not falling. And if the stock markets are rallying, I bet that Snapchat stock is also rising.
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