Embattled IPO ETF Faces 200-Day Acid Test

It's been rough sledding for IPOs lately, and no chart sums it up better than this one

Nov 19, 2019 at 7:33 AM
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Perhaps no single name better exemplifies the sheer exhaustion surrounding the late-2019 initial public offering (IPO) market than WeWork. Hopes for a roughly $9 billion public debut evaporated seemingly overnight in late September amid grave concerns over out-of-control spending and lack of oversight, and the office-space specialist has since received emergency funding from SoftBank to help it stay afloat.

And then there's Slack Technologies (WORK), which has strung together a textbook downtrend on the charts since its late-June arrival on the New York Stock Exchange (NYSE) -- and upscale exercise bike firm Peloton (PTON), which has yet to actually trade as high as its $29-per-share IPO price. (Yes, it's true; you could say that the Peloton IPO has been spinning its wheels.)

No wonder investors have recently been treated to headlines like "The IPO market is in a slump," "DNEG becomes latest victim of frosty IPO market," and "The struggling IPO class of 2019 could be facing another wave of selling soon." Meanwhile, nestled among those doom-and-gloom warnings is the news that Saudi Aramco, the world's most profitable company, is on the brink of launching what may be the world's largest IPO -- a possible contrarian warning sign that there may be some lingering "frothiness" yet to wring out before the leanest of times are truly over for the IPO market.

The accompanying chart of the Renaissance IPO ETF (NYSEARCA:IPO), comprised exclusively of companies that are no more than two years removed from their IPO date, accurately reflects the struggles facing this group in recent months. While the S&P 500 Index (SPX) and other broad-market equity benchmarks have recently broken out to new record highs, IPO's July 26 closing high of $33.49 -- an all-time peak set in tandem with the S&P, at the time -- remains emphatically unchallenged.

Steady outflows over the intervening weeks certainly haven't helped IPO's case. After racking up year-to-date inflows of $38.60 million in the year-to-date period through July 26 -- a fairly staggering total, given the exchange-traded fund's (ETF's) assets under management (AUM) of $42.60 million -- IPO has since registered net outflows of $11.45 million.

But while it's still about 9% below its months-old closing high (improved from its peak-to-trough decline of 17.6%), IPO's pullback has been anything but disorderly. Twice in October, the shares successfully tested support at the $27.50 level, which previously played the role of a technical floor back in early February. This area is also now home to a 50% retracement of IPO's rally from its Dec. 24 closing low to its July 26 high close, further boosting the bullish significance of the catch-and-hold here. The twin lows last month coincided with IPO's 14-day Relative Strength Index (RSI) bottoming out around 27, in "official" oversold territory.

Since that recent double-low, IPO has also broken back out above its 40-day moving average, which acted as overhead resistance during the decline off the late-July peak. IPO has already had an opportunity to re-test and bounce from this trendline, currently located directly below the $29 level.

The next immediate challenge lies in the form of the 200-day moving average, at $30.42. IPO on Friday made its first intraday move above this closely watched trendline since it was first breached to the downside on Sept. 24 -- but couldn't hold its footing, and subsequently closed the session dead even with this major technical level (as in, within a few thousandths of a point). Rather than serving as steady support or resistance, this moving average more often represents a "line in the sand" between periods of bullish and bearish price action for IPO, with the ETF tending to make fast breaks both above and below this psychological barrier when it's been encountered in the recent past. As such, it may not take long for IPO's next directional move to play out in relation to its 200-day, and that knee-jerk reaction just might tell us all we need to know about the short-term outlook for this corner of the market.

ipo stock chart

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, November 17.


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