FIT Stock: Bearish Headwinds Prevail
I was neutral on Fitbit Inc (NYSE:FIT) stock because of the potential for a bottoming price pattern to develop. I had outlined in a previous article that a potential double bottom was in play, but that the price needed to close above a certain level in order to confirm this trend reversal pattern.
Any glimmer of hope that a bullish outcome was possible was completely quashed after Fitbit reported its earnings. Fitbit stock reported a disappointing quarter, but it was its fourth-quarter guidance that was responsible for the single largest percentage-change drop in FIT stock history.
The fourth quarter represents the holiday season and, for most companies that sell gadgets, it is the single-most important quarter for sales. Guiding down prior to the holiday season in anticipation of a bad quarter is not something you want to hear as an investor. Investors acted appropriately, and sent FIT stock down 33% on this news.
The following Fitbit stock chart illustrates the long-term trend.
Chart courtesy of StockCharts.com
The downtrend in Fitbit stock began seven weeks after FIT stock went public. The price action that followed has served only to reaffirm the bearish theme. The price action on the chart above is characterized by consolidation waves (highlighted in purple) that continue to give way to bearish impulse waves (highlighted in green).
The recent price drop did quite a bit of damage to the chart. The level of price support highlighted by the consolidation wave was broken and, in the process, a moving average convergence/divergence (MACD) bearish cross was generated.
MACD is a simple and effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish signals. The bearish cross indicates that the bears are once again in control of FIT stock and are flexing their muscles, as any bullish headwinds generated from the bullish cross have ended.
The following Fitbit stock chart illustrates other signals that reaffirm my bearish view.
Chart courtesy of StockCharts.com
A death cross is a bearish signal that is produced when a faster 50-day moving average (highlighted in blue) crosses below a slower 200-day moving average (highlighted in red). Traders use this signal to determine if the price momentum is bullish or bearish.
This bearish indicator has ruled the trading action in FIT stock and, in early October, there was a glimmer of hope that a golden cross was going to generate. This would have been a major win for the bulls, if it were able to sustain itself.
This signal quickly averted, and failed signals are powerful indicators that I have learned should never be ignored. Averted signals are extremely powerful indicators and, as a result, the trend tends to accelerate after such a signal is produced. The reason why the trend accelerates is that any trader who used the new signal to put on a trade needs to quickly unwind it.
The only solace I can provide for the bulls is that the price has failed to follow through on the downside after the price gapped lower. This leaves the door open to a bear market rally that can have FIT stock trade back to $12.00 and test this price level that had acted as support. From the current price, this does represent a significant gain for Fitbit stock investors, but I would refrain from putting on bullish positions when all other indicators continue to be bearish.
If Fitbit stock can sustain a close above $12.00, I would consider reviewing my bearish view.
Bottom Line on Fitbit Stock
Any bullish price action that could have developed was quickly quashed and, as a result, my neutral bias has now swung to bearish. I would be on the lookout for bearish setups to trade under such circumstances. In order for my bearish bias on Fitbit stock to change, I would need FIT stock to trade higher to undo all of the bearish signals that have just generated.