At time of writing, the share price of Zip Co Ltd [ASX:Z1P] is down 1.09%, trading at $5.47.
The Zip share price has smashed through resistance after trading sideways for four months:
Today we examine whether a pullback will occur in Zip shares, with a bit of technical analysis, and one eye on their financials.
Relative strength index pointing to Zip share price pullback
The Zip share price experienced a bullish crossover of its 20- and 50-day moving averages at the start of September.
From this point it had six winning sessions, then retraced briefly for a corresponding six sessions.
After a small winning session and then the tinniest of losses, it then went on a remarkable run of 16 straight days in the green.
This was without any price-sensitive announcements, and in doing so, the Zip share price smashed through resistance at $4.
From the start of this run (where it was sitting at around $3.60) it has gained a remarkable 57.8%.
However, if you look at the Relative Strength Index (RSI) at the bottom of the chart above, you can see it has been trading in an overbought range since the end of September.
The RSI is a technical indicator developed by J Welles Wilder Jr in the late 70s, and can point out buying or selling opportunities.
It will rise as the number and size of positive closes increases and fall as the number and size of losses increases.
Generally, a reading above 70 indicates a pullback may be on the cards, while a reading below 30 indicates the stock in question may be undervalued.
In the case of Zip, shares of the company have been on a tremendous run after an accumulation phase.
What was happening between May and September could have been old holders selling at a significant profit and new money entering as these people exit.
This would explain the relatively static share price and choppiness during this period.
Now it has gone flying up, the pullback could just be getting underway as the RSI currently sits at around 88 — meaning it is overbought by traditional understandings of the RSI.
Correlation with Afterpay share price useful for understanding the money flow
As you can see in the chart below, the Zip share price and the Afterpay Touch Group Ltd [ASX:APT] share price have gone through periods of strong correlation:
This makes sense as the two stocks operate in the same buy now, pay later (BNPL) space.
Money has been moving into the fintech sector for quite some time as the Big Four banks slowly unbundle.
They share similar regulatory obstacles and you could even go so far as to say that Zip is an ‘APT clone’.
But let’s switch gears for a moment.
Their reissued Annual Report reveals $84 million in revenue, transaction volume of $1.1 billion and 1.3 million active customers.
These are strong numbers, but it’s still not turning a profit and its price to sales ratio sits at nearly 23.5.
It’s close to a profit, with a loss of just $1.4 million, and the money that has recently flowed into the stock could be reflecting this.
That being said, there’s a case for this fintech stock being overvalued at a market cap of nearly $2 billion.
Considering its up over 440% for the year, it could be worth at least considering taking some profits.
It appears some people are doing this today, and based on the previous RSI discussion, they could do so until the Zip share price comes into a more normal range.
For Money Morning