Has Spotify (SPOT) Topped Out?

Luxembourg's Spotify Technology S.A. (SPOT) posted an all-time high at $299.67 on July 22 and turned lower, just one week before missing fiscal third quarter 2020 loss estimates by an astounding €1.45 ($1.73). The digital entertainment company posted a loss of €1.91 per share on a 13% year-over-year revenue increase to €1.89 billion, also missing estimates. Even so, impressive monthly active user (MAU) growth of 29% year over year kept most shareholders from hitting the exits.

Key Takeaways

  • Spotify posted a much larger-than-expected loss in the most recent quarter.
  • Long-term price action shows a tendency for the stock to rally into and reverse at big round numbers.
  • The stock has been stuck in neutral for the past three weeks.

Spotify stock fell less than 2% after the news but has barely budged in the past three weeks, posting weak volume while bouncing along two-month range support above $240. Time is running out because relative strength indicators are starting to roll over, indicating that gravity could take control of the ticker tape and drop the volatile growth play into an intermediate correction that may target new support just below $200.

Wall Street has made no new calls since the earnings release, maintaining a "Moderate Buy" rating based upon 12 "Buy," 8 "Hold," and a hefty 4 "Sell" recommendations. The scattering of price targets also illustrates broad disagreement about Spotify's outlook, with a low of $172 and a Street-high $357. The stock is currently trading just $7 below the median $262 target in a placement that matches the current holding pattern.

Ticker tape refers to the ribbon of paper or electronic representation of price quotes that appear in a linear fashion, providing market information to investors. Ticker tape first appeared as part of 19th-century ticker devices that printed stock symbols and numeric data to convey information about trades and prices via information transmitted over telegraph wire. 

SPOT Daily Chart (2018 – 2020)

The company came public on the U.S. exchanges at $165.90 in April 2018 and entered a healthy uptrend that topped out at $198.99 in July. Bears took control through year end, dumping the stock through the IPO opening print and into December's all-time low at $103.29. It struggled through all of 2019 and into January 2020, stalled below tough resistance near the $150 level. Price action failed two rally attempts during that period while finding support near $110.

A downtick gathered strength in March 2020, dropping the stock to $109, while the subsequent uptick reached 2019 resistance in April. A May breakout attracted strong momentum buying interest, lifting price into the 2018 resistance just a few days later. It broke out in mid-June and soared above $250, finally topping out near $300 in late July. Price action since that time has been range bound, finding support at the July 14 low at $243.

Range-bound trading is a trading strategy that seeks to identify and capitalize on stocks trading in price channels. After finding major support and resistance levels and connecting them with horizontal trendlines, a trader can buy a security at the lower trendline support (bottom of the channel) and sell it at the upper trendline resistance (top of the channel).

SPOT Short-Term Outlook

Long-term relative strength indicators have rolled over at overbought levels but still haven't confirmed new sell signals. However, this crossover is waving a red flag, warning that the stock is running out of time to bounce off the $240 level and resume the strong uptrend. A rally above $285 is needed at this point to improve the mixed outlook because a reversal at or below that level may complete a head and shoulders pattern, with a breakdown targeting a decline into the $180s.

Looking back, price action has shown a repeated tendency to rally into and reverse at or near big round numbers. For example, the 2018 uptick reversed at $200, while the subsequent downturn found support at $100. In addition, the buying surge into May 2020 stalled at $200, while the subsequent breakout and momentum-fueled uptrend ended right at $300. This behavior raises the odds that the stock has topped out once again and will soon set its sights on the $200 level.

The Bottom Line

Spotify stock may have topped out after a powerful trend advance and could eventually sell off to $200.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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