Snap Stock Falls From Overbought Levels as Traders Take Profits

Snap Inc. (SNAP) shares fell more than 2% during early trading on Wednesday as traders took profits following the stock's rise of more than 120% since the beginning of the year. While the company may finally be gaining some traction after a rough two years, many analysts remain cautious given the rapid increase in price and execution risk.

Last week, the company launched Snap Games – a new real-time multiplying gaming platform featuring original and third-party games. The platform will provide monetization opportunities for game development partners through non-skippable, six-second commercial ad formats that were launched in Q3 2018. The company also announced new augmented reality features, Snap Originals and "App Stories" for third-party developers.

RBC Capital responded to these announcements by upgrading Snap shares to Outperform with a price target of $17.00 per share last week, saying that the company was finally gaining traction with Android. Morgan Stanley maintained its Underweight rating, however, saying that Snap's ability to monetize the new launches is questionable since 70% of any revenue generated would go to game developers.

From a technical standpoint, the stock broke out from R1 resistance at $12.07 earlier this week before falling lower during Wednesday's session. The relative strength index (RSI) remains near overbought levels with a reading of 68.03, while the moving average convergence divergence (MACD) continues to trade sideways. These indicators suggest that the stock could see some near-term consolidation before moving higher.

Traders should watch for some consolidation within the stock's upward price channel with support at around $11.50. If the stock breaks down from these levels, traders could see a move lower to the pivot point at $10.62 or the 50-day moving average at $9.91 to close the gap from mid-March. A breakout from trendline and R2 resistance at $13.13 could lead to fresh reaction highs, although that scenario appears less likely in the near term.

The author holds no position in the stock(s) mentioned except through passively managed index funds.