SNAP Stock Is in Danger of Falling Off a Cliff

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SNAP Stock: Testing a Very Important Level of Price Support

This is really a tumultuous market characterized by extreme levels of volatility as the market tries to come to grips with the notion of higher interest rates and the prospects of a trade war.

These wild swings are difficult to stomach, and aside from a being a market best suited for traders, highly volatile markets are usually geared toward lower index values. I have been outlining stocks that are poised to move higher in this environment, but I am going to change things up a bit and focus on a stock that is in danger of plummeting. The one fact that cannot be disputed is that this current market is a weak one and that the path of least resistance is therefore currently geared toward lower prices, which is a ripe environment for bearish stocks to break down.

The company I am focusing on is Snap Inc (NYSE:SNAP) stock. Earlier this year, it looked as though Snapchat stock was putting in a bottom, but that picture has changed drastically in recent months. The current setup is quite alarming and it could be suggesting that quite a significant drop in Snap stock may be on the horizon.

The price pattern that has me currently concerned is highlighted on the following SNAP stock chart.

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Chart courtesy of StockCharts.com

The pattern highlighted on the Snapchat stock chart is a megaphone price pattern, and it is identified by applying two diverging trend lines that were created by connecting the series of higher lows and higher highs that created this pattern.

The megaphone price pattern is the opposite of a triangle pattern, and as the pattern progresses, the range between support and resistance begins to widen. Triangle price patterns are my among my favorites, while megaphone price patterns are among my least favorites—they are a source of much grief because it is difficult to gauge whether the stock is trending higher or lower. In fact, the price action is just consolidating within an awkward expanding range.

Currently, Snapchat stock is testing support outlined by the megaphone price pattern, and it is imperative that Snap stock stays above this level of price support because falling below it would imply that lower prices are likely to follow.

This notion of lower prices is magnified when it is viewed within the context of Snapchat stock’s predominant trend.

This predominant trend is highlighted on the following Snapchat stock chart.

Chart courtesy of StockCharts.com

This SNAP stock chart highlights an alternating wave structure that has been responsible for creating and sustaining a bearish trend in SNAP stock.

This alternating wave structure consists of impulse waves and consolidation waves.

The wave highlighted in green is an impulse wave, and these waves capture the stage in a bearish trend where a stock sustains a move toward lower prices.

The wave highlighted in purple is a consolidation wave, which captures the stage in a bearish trend where the stock price refrains from declining. Consolidation waves are an essential part of every bearish trend because they create the necessary conditions so a new declining impulse wave can follow.

The megaphone price pattern currently in development could double as a consolidation wave, and a break below support would imply that a declining impulse wave is in development and that lower SNAP stock prices will follow.

The moving average convergence/divergence (MACD) indicator located in the lower panel is in perfect alignment to support such a bearish outcome.

MACD is a trend-following indicator that uses the crossing of a signal line to distinguish whether bullish or bearish momentum is influencing the price action in a stock. Bullish momentum implies that a stock is likely to appreciate, while bearish momentum implies that a stock is likely to depreciate. This is very pertinent information because a stock cannot sustain a move in either direction unless the applicable momentum is supporting it.

While the megaphone price pattern was in development, the MACD indicator had been in bullish alignment, supporting the notion that higher prices were in development. The problem that arises is that currently, this MACD indicator is converging and a bearish cross is likely to be generated in the weeks ahead if Snapchat stock falls below price support.

Analyst Take

SNAP stock is testing a very significant level of price support, and its inability to maintain this level of price support will likely lead to more bearish signals, which would support the notion that much lower Snapchat stock prices are in development.