AppLovin (APP) shares have been trading sideways for the past two months, oscillating between support at $297 and resistance at $352. This consolidation follows a sharp decline of 60% from its all-time high, erasing billions in market value. Technical analysis reveals the formation of an island reversal pattern, a signal that often precedes a rebound.
The daily chart shows the stock has fallen below all major moving averages, and a death cross occurred on July 15 when the 50-day and 200-day exponential moving averages crossed bearishly. Despite this, the Relative Strength Index (RSI) and Percentage Price Oscillator (PPO) have been trending higher, indicating a bullish divergence. This divergence suggests that selling momentum is waning, and a reversal could be imminent.
An island reversal pattern typically forms when a gap down is followed by a period of consolidation, creating an isolated cluster of prices. This pattern often leads to a price recovery as traders attempt to fill the gap created by the initial drop. If the stock rebounds, the first major resistance level to watch is $400, which aligns with the gap area from the post-earnings selloff.
However, the bullish thesis would be invalidated if the stock breaks below its year-to-date low of $297. In that scenario, the next support level is around $250. The Wyckoff theory also supports a potential rebound, as the stock appears to be in the accumulation phase, which typically precedes a markup phase.
The recent decline was triggered by disappointing second-quarter results, which missed both analyst expectations and management's guidance. Management acknowledged the shortfall, stating, "We delivered almost $2 billion in revenue, which was just below the midpoint of our guidance range, and our Adjusted EBITDA was just below the range." This admission led to a wave of price target cuts from major banks, including Morgan Stanley (to $450), BTIG (to $396), Evercore (to $510), and Needham (to $475).
On a positive note, management has identified the issues in its gaming segment and implemented corrective measures. Analysts expect revenue to grow 47% to $2.07 billion in the current quarter, with earnings per share rising from $2.45 to $4.03. For the full year, EPS is projected to increase from $9.75 to $15.67.
Despite the recent weakness, AppLovin's forward price-to-earnings ratio has dropped to 18, below its five-year average of 29, though still above the sector median of 13. This valuation, combined with the technical patterns, suggests that the stock may be undervalued and poised for a recovery.
Investors should monitor the $297 support level closely. A break below this could lead to further downside, while a successful rebound could target $400 and beyond. The upcoming earnings report will be crucial in confirming whether the turnaround is on track.
This article is for informational purposes only and does not constitute financial advice.
