Interactive Investor

Chart of the week: has this tech stock made a bullish breakout?

12th July 2021 10:16

John Burford from interactive investor

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Our columnist looks at the price chart of an exciting cloud computing company that may be on the up.

Snowflake (NYSE:SNOW) is not a start-up by a group of sensitive students, but a real presence in the world of cloud computing. 

Although much smaller, it is a direct competitor (and colleague) of the Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) giants who dominate that sector.  I was impressed when I learned that over 50% of Fortune 500 companies use their software. So it should be treated with respect in terms of earnings growth potential.

But in common with many recent IPOs, it is still losing money. It seems many investors are only interested in money-losing outfits these days! Remember the run-up to the dot-com bubble at the millennium? A high 'burn rate' was de rigeur to generate a huge IPO valuation. Companies with actual profits were shunned.

Of course, we are in a different world 20 years on. The internet has grown and matured rapidly from those early days and many companies are making real and solid businesses from it – and Snowflake is in a high-growth sector.

But it is the chart pattern that interests me – especially after Friday's action:

Past performance is not a guide to future performance.

And that advance to the $270 mark broke above the trendline that I have labelled the 'neckline' of a Head and Shoulders reversal pattern. 

It had been forming since March, with the Head dipping to the $200 low. But with Friday's spurt, odds have significantly increased that the uptrend has been re-awakened.

But note the price pattern after the IPO. As is usual, early bird investors drive the shares up as the initial hype enthuses many. Then, reality dawns and the hype starts to wear off and prices sag, especially when profits seem some distance away.

But that is when investors can take a calmer look at the company prospects and can be offered much better entry prices. In general, with tech valuations so high now, waiting for better prices long after an IPO often pays off.

If this is a genuine neckline break, my first main target is the $340 area with higher potential. A break below $230 would send me back to the drawing board but would probably not kill the bullish potential.

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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