Spotify Stock Is Sitting in a Very Precarious Position

Spotify-Stock-Is-Sitting-in-a-Very-Precarious-Position
iStock.com/Bence Bezeredy

SPOT Stock: Looking Down into an Abyss

The current stock market environment is atrocious. The selling pressure that hit the major market indices in October has done its share of technical damage. The stocks that had been the pillars of support sustaining this bull market have begun to crumble.

That is one of the major reasons why I no longer believe that a bull market is now in development. Instead, I believe that we are in the process of putting in a significant market top.

Market tops are characterized by volatility, where the major market indices experience wild swings. These wild swings produce dramatic sell-offs and equally-as-impressive market rallies. These wild swings are how markets transition from a bullish trend into a bearish one.

These are the conditions we currently find ourselves in, which is another reason why I am holding a bearish view and am not too delighted about the prospects of this market.

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I am focusing on Spotify Technology SA (NYSE:SPOT) because it currently sits in a precarious position. SPOT stock has just fallen below a key level of price support and the implications are suggesting that further losses are now likely to follow.

This level of price support I am referring to is captured on the following stock chart.

Chart courtesy of StockCharts.com

This chart illustrates that a significant level of price support resided at $135.51.

What makes this level of price support special is that it was established the second day after Spotify stock began trading on the New York Stock Exchange (NYSE). It marked a low and then the stock price proceeded to stage an advance.

This advance was in true bull market form; it was characterized by price action consisting of a series of higher highs and higher lows. Almost four months after the lows were established, SPOT stock managed to tack on 46.85% in gains.

The bullish price came to an end in September, when Spotify shares reversed course and started making a bearish trend, consisting of a series of lower lows and lower highs. What took almost four months to make was erased in half the time, as the bearish price action eliminated all the gains that came before it.

Unfortunately, on November 12, 2018, Spotify broke below the significant level of price support that resided at $135.51.

The break below this standing low is a very significant event. Not only has it created a new low in the process, but the ramifications are suggesting that lower prices are now likely to follow.

This event has placed investors in a very daunting position. Anyone who initiated a position in Spotify since it began trading is now sitting with a losing position. As the losses mount, investors are inclined to sell.

Given the time of year, it also gives investors an incentive to take a loss in order to offset any capital gains they may have made on the year. This factor alone can fuel further losses going into year-end.

From a technical perspective, the event can be used to suggest a potential price objective, where SPOT stock might ultimately bottom. This price objective is obtained by taking the height of the move above the standing low and projecting that value below it. Putting this theory to work suggests that Spotify stock can potentially fall to as low as $75.00 before a bottom is finally found.

This price objective is suggesting that the stock price can fall another 43.02% from its current level, if things play out as the price action suggests. This is the reason why I believe that the stock currently sits in a very precarious position, essentially looking down into an abyss.

In order to negate the bearish implications suggested by this event, Spotify shares would need to regain their footing back above the level of price support that has just been broken. The longer it remains below this price point, the more likely a move toward lower prices is going to follow.

Analyst Take

I am bearish on Spotify stock. The reason why I am carrying a bearish view on this stock is because SPOT stock has just broken below its standing low, which was set on April 4, 2018. This event carries implications suggesting that much lower prices are now likely to follow.