Chart Of The Day: E-Tail Giant MercadoLibre Tops Out Despite Positive Fundamentals

MercadoLibre (NASDAQ:MELI) is one of Latin America's largest online retail platforms. The Argentinian e-tailer saw business boom during lockdowns when people sheltered in place and conducted their shopping from home.

In 2020, MELI's gross merchandise volume (GMV) nearly doubled, and its total payment volume (TPV) surged by more than 3/4. Even during the recent quarter, when the economy was reopening and rebounding—favoring cyclical companies, at the expense of tech firms—MercadoLibre kept growing. GMV expanded by almost a quarter to $7.3 billion, and TPV catapulted 44% to $20.9 billion.

These surging operating metrics translated into impressive revenue performance. Net revenue leaped 86.6% over the first nine months of the year, to $4.9 billion. Net income exploded, almost increasing three-fold, to $417.4 million from $152.8 million.

All this activity puts the company on track to becoming the leading e-commerce company in Latin America. As of April this year, the company had the most regional online visitors, nearing 668 million visits a month, more than triple the number of visits by residents of Latam to Amazon (NASDAQ:AMZN).

With fundamentals in such good shape, why have MercadoLibre's technicals topped out, signalling the stock is on the verge of another leg lower?

MELI Daily

Bulls have been attempting to keep the price within its rebound boundaries since Dec. 6, but the odds are against them. The price already slipped below the confines of the rising flag, just where it meets with the bottom of the falling channel since the Sept. 2 peak.

The preceding price action had all the telltale signs of a bearish, rising flag. The previous move included a breathtaking, sheer 40% drop in less than a month, between Nov. 9 and Dec. 6. This activity was accompanied by escalating volume, which dried out amid the rising churn that followed signs of changing the guard from early, sated and tired bulls to fresh, hungry bears ready to lead the next leg down.

Oh, and adding to the mix, the 50 DMA fell below the 200 DMA, triggering a Death Cross.

Moreover, this isn't just any run-of-the-mill Death Cross. The 50 DMA gained on the 200 DMA even as it fell, increasing its bearishness. There's more.

MELI Weekly

The falling channel made up the right side of a weekly double top, which cut through the 50 WMA. As well, the flag is a return move, retesting the neckline, joined by the bottom of the channel and the 100 WMA.

Bears are cashing out, reducing supply and increasing demand as they bid the price up to cover a return of securities to their brokers. Once that ends, we expect the stock to plunge, likely losing as much as half its value, based on historical statistics regarding this type of trading pattern.

Trading Strategies

Conservative traders should wait for the price to fall below the 200 WMA, before rallying to find its resistance.

Moderate traders would wait for the weekly close to confirm the current price.

Aggressive traders could short at will, provided they do so according to a plan that fits their needs. Here's an example showcasing the basic components of a coherent plan:

Trade Sample

• Entry: $1200
• Stop-Loss: $1300
• Risk: $100
• Target: $900
• Reward: $300
• Risk-Reward Ratio: 1:3

Author's Note: We are not in the business of fortune-telling. Rather we weigh the evidence based on past statistical trading, according to the principles of technical analysis. We are not saying that this is what will happen. Instead we're suggesting that this is most likely to occur.

The sample merely illustrates the basic requirements of a plan. However, you must customize a plan to address your timing, budget and temperament in order to increase your overall trading skill and statistical success. This doesn't happen overnight. You may use our sample for educational purposes, not profit, or you'll end up with neither. Guaranteed. And no money back.