Shares of Internet radio service provider Pandora Media Inc (NYSE:P) fell hard following the company’s latest earnings report late last week. P stock has been on a steep decline for the past 11 months, but with oversold readings reaching severe levels, active investors should consider a contrarian play on Pandora (i.e., an oversold bounce).
For its fourth quarter, Pandora missed both on the top and bottom lines and gave a 2015 outlook that investors weren’t excited about. Specifically, revenues of $268 million were 30% better year-over-year, but still below expectations of $276.5 million. Meanwhile, earnings of 18 cents were a penny off the consensus.
Active listeners — an important measure for the company — stood at 81.5 million at the end of 2014, which grew 7% YOY. After Pandora also announced a weak revenue outlook for 2015, investors began selling with both hands while analysts were quick to downgrade the stock.
After it was all said and done, P stock lost 17.22% in heavy Friday trading of more than 37 million shares. For the near term, Pandora increasingly looks to have sucked in the last of the bears and stopped out many remaining bulls.
P Stock Charts
Looking at the multiyear weekly chart of P stock, we see that the selling since the March 2014 top has now found potential support at a previous resistance area (blue bar). Second, the 11-month selloff has taken the shape of what could be labeled a falling wedge pattern, which has potential bullish implications, particularly if Pandora can ultimately break out of this pattern to the upside.
Sentiment in the stock has gotten extremely bad, and while Pandora certainly has its share of tough competition to deal with, the bigger technical picture combined with negative sentiment might be just the recipe we need for a solid oversold bounce to take place in coming weeks.
On the daily chart, we see that last Friday’s heavy-volume selloff broke P stock below a tight multiweek formation, but it nonetheless managed to close the day around the January lows (not much below there). Thus Friday’s intraday lows near $14.50, which also match up with the blue support line on the above chart, is the area that active investors and traders want to focus around.
But because trying to catch a falling knife is rarely a good idea, we’ll first need a bullish reversal day for the probability of a bounce to improve. Any up-gap and rally from here, or a failed intraday selloff in coming days, will allow traders to try a good-probability trade on the long side in P stock. A first upside price target would be around the $17 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
