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Overbought Stock of the Day: Snap Inc. (SNAP)

Overbought Stock of the Day: Snap Inc. (SNAP)

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  • Shares of Snap Inc. (SNAP) gapped higher last week as the social media company trounced on earnings. A rising customer base and increased ad revenue allowed shares to rally over 20 percent.

    Signs of how far the company has gotten overbought are everywhere. The relative strength index, or RSI, peaked at over 87. A single down day for shares since earnings still leaves shares at an overbought 84. The company’s share price is 60 percent higher than its 50-day moving average, a sign that the move has gotten stretched.

    What makes a pullback most likely, however, is the gap shares experienced after earnings. Typically, a stock that gaps will try to close the gap. As that happens, share are likely to drop from their current price towards the mid-to-low $30 range. Therefore, a classic pullback is likely in the works.

    Action to take: The January 2021 $35 puts would move in-the-money as shares started to close the gap. Trading for around $1.50, it’s an inexpensive downside trade that could even provide a double for traders if the gap is fully filled in the low $30 range.

    Given the company’s disconnect from the fundamentals, even after a solid earnings report, this trade looks like a solid trade, even for traders who expect the market rally to continue.

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