Why 'Amazon of Argentina' MercadoLibre Stock Looks Set To Bounce

Zinger Key Points
  • MercadoLibre is trading lower on higher-than-average volume on Monday.
  • The company's relative strength index has dropped to the 31% level.

MercadoLibre, Inc MELI was plummeting an additional 13% lower on Monday to reach a 52-week low, after having plunged over 10% between May 5 and the start of the trading day.

On May 5, the Argentina-based e-commerce company, with a similar business model to Amazon, Inc AMZN, printed mixed first-quarter earnings. For that quarter, MercadoLibre reported earnings per share of $1.30, which missed the consensus estimate of $1.35. The company reported sales of $2.25 billion, beating the $2.02 billion estimate.

Following the news, Credit Suisse maintained an Outperform rating on MercadoLibre and raised its price target to $1,450. The increased target price suggests an 80% rise in the company’s share price, but doesn’t take into consideration the current overall market cycle, which is bearish.

At least a temporary bounce to the upside is likely to come over the next few days, because MercadoLibre has developed signals on the chart that indicate a reversal will take place.

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The MercadoLibre Chart: MercadoLibre has developed three possible signals that a bounce is likely to come, although taking trades that are anti-trend, especially in a bear market, is risky and patience is required.

First, MercadoLibre is trading lower on higher-than-average volume. At press time, over 672.73 million MercadoLibre shares had exchanged hands, compared to the 10-day average of 574.88 million. Traders can watch for a bearish volume climax to occur, indicating the bears have become exhausted, which is often followed by a bounce.

Second, MercadoLibre’s relative strength index (RSI) has dropped to the 31% level, which has put the stock near oversold territory. When a stock’s RSI reaches or falls toward or below the 30% mark, it can be a buy signal for technical traders, although it's important to note that an RSI can remain extended in both directions for long periods of time.

Third, At the low-of-day on Monday, MercadoLibre reached and bounced from a heavy support zone near $800. The area is significant psychologically due to the round number and technically because the stock hasn’t traded below the level since May 2020, when MercadoLibre was recovering from the lows brought on by the beginning of the COVID-19 pandemic.

Of course, MercadoLibre is currently in a downtrend and the bears are squarely in control. Bearish traders who aren’t already in a position can watch for MercadoLibre to eventually spike upwards to print the next consecutive lower high in the pattern.

MercadoLibre has resistance above at $860.71 and $922.09 and support below at $800 and $756.48.

See Also: How to Read Candlestick Charts for Beginners

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