Robinhood-HOOD
Robinhood stock (NASDAQ: HOOD) took heavy losses yesterday after SEC Chair Gary Gensler warned its business model has ‘an inherent conflict of interest’. Gensler told Barron’s that the Securities and Exchange Commission has not ruled out a total ban of the controversial selling of client order flow despite earlier reports suggesting the opposite.
The Nasdaq-listed trading app Robinhood Markets Inc generates a large part of its revenue by routing clients orders through algorithmic market-makers such as Virtu and Citadel Securities, who execute the orders for a slice of the profits. Although legal, this practice has come under fire for giving market-makers an unfair advantage. As a result, payment-for-order-flow has been banned in Canada, Australia and the UK. And now it appears U.S market regulators could be next to outlaw the questionable business model.
Robinhood stock was already under pressure even before the report hit the wires. Earlier in the day, PayPal announced it is exploring a stock-trading platform of its own. Paypal joins the list of tech companies, including Square and SoFi, aiming for Robinhood’s share of the retail trading boom. Faced with the double-threat of tightening regulations and increasing competition, HOOD slid more almost 9% to an intraday low of $42.56 before recovering to $43.64, a loss of -6.89% on the day.
The 60-minute chart shows that since its exchange listing in July, Robinhood stock has been extremely volatile. In the first week of trading, HOOD jumped 123% to a record price of $85.00 before losing 40% the following day. Since then, Robinhood has been trending broadly lower, forming a narrowing wedge pattern.
Late in August, HOOD broke out on the upside, reaching a four-week high of $50.99 before reversing. Yesterday’s steep decline has forced the stock back towards the top end of the narrowing wedge at $42.00. This should be considered the first significant support level. If HOOD slips back into the downtrend, a move to the lower end of the pattern at $38.00 looks probable. However, in this short time frame, the Relative Strength Index (RSI) is reading 27.02, which is oversold.
Nonetheless, considering the current fundamental backdrop, the path of least resistance is lower. I expect the stock to trade negatively and ultimately find its way to trend line support at $38.00. Which coincidently is the price of its listing in July.
Although, if Robinhood stock reverses yesterday’s drop and closes above $46.30, it will invalidate the immediate bearish outlook.
For more market insights, follow Elliott on Twitter.