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Chart Says This Oversold Game-Changer Could Pop 20%

Thursday, May 22, 2014 - 3:00pm

I'm constantly scanning the equity markets for overbought and oversold stocks, as well as those that have seen a flurry of mainstream or social media activity. These names often make for great swing trading candidates.

One oversold stock that recently popped back on my radar is Gogo (Nasdaq: GOGO), a provider of in-flight Internet connectivity and wireless in-cabin digital entertainment systems. The company sells Internet access packages to travelers, who can sign up on a monthly or daily basis.

Having personally used Gogo many times on flights across the country, I am a believer in the service, and while it could always be improved, I don't have any major complaints.

This month, Gogo reported better-than-expected first-quarter results. A loss of $0.20 a share came in ahead of the $0.25 loss analysts had anticipated. The company also beat on the top line, with revenue rising 35% year over year to $95.7 million.

Following the report, GOGO jumped off its lows and has since been forming what looks to be a promising base.

Gogo has been a publicly traded company only since last June. As is often the case with IPOs, investors need time to come to grips with a company's business model and cycles. And traders need some price history to see how a stock will react to certain levels, moving averages and news flow.

On GOGO's chart, the honeymoon phase ended with a parabolic rise in December. As I always say, when a stock's slope becomes too steep it is only a matter of time before we get a nasty mean-reversion move -- or worse. In this case, the slide has erased all of GOGO's gains and then some, taking the stock below its $17 IPO price.

In its 11-month history, GOGO has shown a tendency to mean-revert to its 50-day simple moving average when it deviates too far from it.

In the two weeks leading up to the company's first-quarter earnings announcement, GOGO cratered 35%, indicating investors feared the worst, as they had seen with many other momentum stocks in the past few months. Once the earnings were released, however, the stock jumped, and it now looks ready to slowly mean-revert back to the 50-day moving average.

On the daily chart below, we can see that GOGO currently sits right at its 21-day simple moving average, which is a near-term moving average that I like to use as a reference area. With last week's up gap after earnings, momentum appears to be strong enough to push the stock past this level sooner rather than later.

The logical upside target is the confluence area of the aforementioned 100-day moving average, the December 2013 downtrend (red) line, and the top of the down gap from April 29.

Action to Take -->
-- Buy GOGO on a daily close above $15
-- Set stop-loss at $13.50
-- Set initial price target at $18 for a potential 20% gain in two to five weeks

This article was originally published at
Mean Reversion Move Looks Set to Pop This Oversold Stock 20%

P.S. My colleague Andy Obermueller has also long been a fan of Gogo. In his latest report, Andy sizes up five game-changing technology trends with the potential to revolutionize the way we live our lives -- and make early investors a killing. To learn more about these innovative technologies and the companies behind them, follow this link.

Serge Berger does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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