Divergence Chart Review – Snap, Inc

This is part 1 of the Divergence Chart Review – Snap, Inc. Part 2 can be found here

Snap, Inc. has pretty much been a disaster since it’s controversial IPO. The stock is down 36% since and there is little faith in this stock overall.  That being said, there have been two previous stochastic divergence signals that led to a 23% move in price each time.

Since it’s launch a year and a half ago, the stock has been in a downward channel.  It recently moved from the lower trend line to the upper trend line and even broke through.  This move was off of a strong buy divergence signal at the breakout point of a falling wedge.    A divergence signal alone isn’t always enough to reverse momentum, but when combined with chart patterns, trend lines, and candles, the signal becomes stronger and more reliable.

In this case, it seems as though the price climbs after earnings reports and then fades away after the euphoria wears off, and it is wearing off.  Even though it broke through the upper trend line, signals are pointing to a reversal.

SNAP Divergence Chart 091017

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This is a High Probably Divergence Trade Because:

  • At channel trend line – stock is at/near the upper bounds of the pattern
  • Shooting star reversal candle – small body, long upper shadow, and small lower shadow
  • Clear divergence signals forming on multiple indicators
  • Past divergence signals have performed well

Stochastic Divergence Analysis

SNAP Divergence 091017

SNAP stock price has just made a higher high, as highlighted in the above candlestick chart.  Over the same time period, the Stochastic (9,3) was above 80 and overbought.  Since then, it moved below 80 and turned back up when the price moved to new highs.  However, when the stochastic moved back up, it did not go over 80. This is the beginning of a divergence.  If the stochastic turns back down and starts to move lower, we will have confirmation of a lower high in the stochastic, signaling divergence and a change in momentum.  This is a bearish signal and if confirmed, the price movement should be on par with the previous signals.

Trade Blueprint:

  • Watch the chart closely.  Look for the stochastic to turn down making a lower high, confirming the divergence.
  • If divergence is confirmed, be prepared to enter a short position.
  • Set an entry price and more importantly, a stop price.
  • Set a price target.  You want to let your winners run, but you do not want to lose out on profits either. Have a plan.
  • Once divergence is confirmed, and entry target price is hit, submit your trade and stick to the plan.

Why the Trade Will Fail:

  • The stochastic fails to turn down and make a lower high
  • The previous divergence signal has not made a full rotation
  • Broke through upper trend line and could be forming a new bullish price channel

It is important to look at all possibilities. Even though signals are telling us one thing, it doesn’t mean it is a certainty.  Many outside influences can affect stock prices at any given time, news, catastrophic weather, and market psychology are among the most influential.

Contact me on Twitter or StockTwits (@jbzstocks on both) if you have any questions or comments.

Trading involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. Opinions, market data, and recommendations are subject to change at any time. It is important to do your own research and analysis before entering a trade.  Any trade you make is at your own risk.  This page is for entertainment purposes only.