Fitbit Inc: Is FIT Stock on a Downward Slope?

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Fitbit Inc ( FIT ) knocked the cover off of the ball last week when the company announced that it had shipped over a million of the new Blaze and Alta devices within the first month of their availability. The stock followed through with another 4% move higher on Monday, but it has yet to impress enough to consider the recent move as anything more than a Dead Cat Bounce.

Could Fitbit go higher? Of course it can, but investor sentiment data and its charts suggest that we'll likely see it revisit the $12 price before it hits $20. To call FIT stock a victim of the "Slope of Hope" would be an understatement.

Most investors have heard of the "Wall of Worry" which refers to a stock, or the market, when it climbs higher despite loads of pessimistic sentiment, a classic "contrarian" trade. The Slope of Hope is the opposite. It occurs when a stock continues to decline amidst optimistic or complacent sentiment, only to slide lower as these optimistic investors begin changing their perspective.

This appears to be the case with Fitbit stock.

The Tides of Sentiment for FIT Stock

Last month, a flock of analysts dropped their outlook on Fitbit stock immediately after the company issued downside guidance with its quarterly earnings report. The downgrades resulted in little downside, as the stock had already been sent reeling from their outlook.

Now, with the stock threatening to break below another key support level, it's likely to see additional downgrades.

In addition to the technical problems, FIT stock is dealing with growing competition from a number of well-known players. Most notable is Apple Inc. ( AAPL ) as the company is rumored to be prepping version 2.0 of its wearable technology, the Apple Watch. This redux is expected to improve many of its options, including activity tracking. In addition, Garmin Ltd. ( GRMN ) and Xiaomi are providing competitive pressure that is not likely to fade.

The solution to these challenges? Innovation instead of iteration. Like GoPro Inc ( GPRO ) Fitbit has a product line that is easy to replicate and hard to improve. Another version of its product is not likely to move the needle. Of course, it could get targeted by another company as a buyout. Still, see my comments on "easily replicated" above, which makes this less likely.

Looking at the charts, two price points stand out as key support and resistance. First, the $12.50 mark will be a key support battle line for FIT stock. Similar battles ensued when Fitbit approached the $32.50 and $27.50 price points, which had been price consolidation levels for the stock.

As is usually the case, the shares tumbled rapidly on breaks below these temporary floors. Using this, a move below $12.50 will set a new bearish target of $10 for Fitbit stock.

Just above the current price of Fitbit stock is the key resistance level of $16. This price level has provided consolidation and resistance for Fitbit stock four times in 2016, meaning the implications of a breakthrough or rejection of $16 for Fitbit stock are huge for traders.

The opportunity for shares to get a boost from a short squeeze rally are minimal if the stock did break $16, but the technical traders would take this as a sign that shares are ready to improves their trend, and as we know the trend is always your friend.

Given this, a break above $16 could provide a small updraft, but not likely enough to drive the stock higher, and nowhere near the current analyst prices, which range from $20 to $35.

Traders will want to watch the aforementioned $12.50, as another break below consolidation will draw sellers into the market again, along with downgrades. From there a target of $10 (another 20% decline) becomes the reality for Fitbit shares. Eventually the stock will find a "fair value" like Blackberry did at $8, a whopping 95% below its all-time highs.

For now it doesn't appear that Fitbit is there yet, but tread lightly for now.

On the bullish side, a break above $16 may open the stock to continue its run to $17.50, but we would consider tight controls on any profits, as the long-term outlook remains something less than a picture of a truly "fit" stock.

As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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