Trading Snowflake After Its IPO Bonanza - TheStreet

Trading Snowflake After Its IPO Bonanza

After a busy first day of trading, Snowflake has settled into a tight trading range and is trying to rotate higher. Here's the trade.
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Snowflake  (SNOW) - Get Report was one of, if not the initial public offering to watch in 2020.

The company raised $3.4 billion in the process, a record for a software company this year.

Snowflake originally was expected to price in the $75 to $85 range, giving it a valuation of $21 billion (at the midpoint of that range). Instead, the IPO price got bumped up to $120, giving the company a $33 billion valuation.

Berkshire  (BRK.A) - Get Report  and Salesforce  (CRM) - Get Report also nabbed a stake in the company, which was a quick way to build up some paper profit. 

That is as the company ultimately opened for trading at $245, giving it a market cap of more than $65 billion. Wow! That’s despite just $265 million in 2019 revenue.

Here’s the thing, though. With such a low float (offering just 28 million shares in the deal) and big stakeholders like Salesforce and Berkshire holding large passive stakes - good for 9.9% and 15.2%, respectively - there is a scarcity of stock.

When there’s a scarcity of something, it can drive the price up because there are simply not many shares to buy. When investors buy and hold the stock, it can create squeezes to the upside.

Trading Snowflake Stock

Daily chart of Snowflake stock.

Daily chart of Snowflake stock.

I know the valuation doesn’t make any sense right now and we’re in a volatile period for the overall market. But when it comes to Snowflake stock, investors must understand that a low float can make a lot of information irrelevant in the short term.

After a wide trading range on the first day of trading, Snowflake settled into a surprisingly tight range between $220 and $250.

For several days the stock struggled with the opening-day low for a while at $231.11. After reclaiming that mark on Monday — and being rejected from it on Friday — the stock began to find some momentum.

On Tuesday, Snowflake stock is threatening to go weekly-up, which would occur on a close above $254.80. If that occurs, it may be enough to get bulls back on board, particularly if the overall market gets moving to the upside.

On the downside, investors have two risk levels to keep an eye on. The first is near $230, where Snowflake has its 10-week moving average and the opening-day low. If the stock fails to hold its weekly-up rotation and breaks these levels on the downside, it puts a possible weekly-down rotation in play at $208.55.

If Snowflake gains momentum over $255, look quickly for a move to the 50% and 61.8% retracements near $264 and $277, respectively. Over $277 and the $300 area is in play, followed by a possible push up to the current all-time high at $319. That’s also the opening day high.

Depending on how things play out, investors may consider using $255 as their stop-loss if we get a decent push over that mark (remember, it's the weekly-up rotation point) and into some of those key retracements.