We have seen this dance before – a stock with a record beat and raise where the fundamentals scream buy, but the market reaction and technicals tell a different story. Palantir Technologies has fallen into that tricky spot where it can exceed expectations and still see the stock trade lower. Expectations around artificial intelligence growth and valuation remain stratospheric, but this coming quarterly report may focus on whether it can re-accelerate its story enough to justify the high multiple. We can let others argue the fundamentals. We are here to focus on price action as it nears next Monday's earnings. The stock is on the ropes as it comes to a crucial technical threshold. How it started… After debuting as a direct listing in September 2020 at $10, the stock climbed as high as $45 before hitting major turbulence and falling as low as $6. Shares bottomed at the end of 2022 and then went on a run for the ages. That ~2700% rally from those lows to the November $207 peak has rolled into a clear topping structure and shows signs that this recent bend, which includes a 35% drawdown, has the potential to break. The Very Public Battle… The supporters and detractors of the stock have made headlines. The peak in shares coincided with infamous short seller Michael Burry of Scion Management taking a short position the week of the stock's all-time highs. That led to a public retort from Palantir CEO Alex Karp slamming the short call and investors betting against his company. Shares continued their descent as the two traded barbs along the way. That decline ended when another influential figure had some positive things to say about the company – President Trump. The President via Truth Social praised the company publicly – even mentioning its ticker – as it was dropping by nearly 15% on the week. His post caused a bounce in price and marked the latest area of technical support. The Technical Battleground… Looking at the charts on multiple time frames, we see two topping formations. On the one-year daily chart we see a head-and-shoulders top with a neckline at roughly $155. The neckline finally broke the day after its last quarterly report. On that day shares gapped 6% higher only to give back those gains over the next two days as the pattern resolved lower. The downward objective from that topping formation is $110 and has yet to be met. However, as price stays under that $155 level as well as its 50-day moving average, it remains on track to resolve lower. Next, we see a clear descending triangle pattern forming that is coiling into an area where a resolution is nearing. The likely cause for price to resolve out of this formation will be reaction to next week's earnings. These patterns tend to resolve in the direction of the primary trend, which in this case is lower. When we back it out even further to a weekly chart over five years, we see price has already broken both its 200-day moving average and 50-week moving averages. This demonstrates weakness and shows the bears are in control. It also puts into perspective the potential amount shares could reverse. A proportional measured move on a breakdown below $125 is much lower than current levels. That could see shares fall to $75. That's a heck of a move and not likely to get there quickly. There are many support levels that should hold along the way before any major wash out. Those support levels are $110 which would be the 100-day moving average as well as our target from original head-and-shoulders topping formation. If price continues to trend lower, look for an acceleration to a key Fibonacci retracement level just under $83. The Trade… We aren't here to pick sides between the President and CEO Alex Karp over Michael Burry. That's not how we view it. We are here to enter a trade where risk management is paramount. Despite a recent minor bullish divergence, momentum remains broadly weak. This reinforces a broken primary trend and a stock in peril. It may be best to see how this shakes out after results. The average move post results is +/-14.7%, so a big move is coming. A rally towards $150/$155 should be sold and use stops around the 200-day moving average at $164 to cover if wrong and the trend is reversing. Traders need to watch that $125 level. If it doesn't hold, expect a deeper flush out. Momentum is pointing that way, and software stocks remain beaten down. Do you know what happens to be one of the biggest components of the iShares Software Sector ETF (IGV)? Palantir – behind only Microsoft and Oracle . We have seen those stocks continue to struggle despite some positive news and there's no reason to think Palantir will not follow in their footsteps. — Jay Woods, CMT with Chase Games DISCLOSURES: All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
