Usually, a bullish report on a publicly traded security doesn’t come with a warning as a first introduction. However, for highly volatile SoundHound AI (NASDAQ:SOUN), it’s necessary. Speculators should realize that SOUN stock is extremely risky, having hemorrhaged almost 61% of equity value since the start of this year. Just in the trailing month, it gave up nearly 21%.
At the same time, optimists will point to the 107% return over the past 52 weeks as evidence of SoundHound’s potential. Certainly, if you catch SOUN stock at the right time, the rewards can be handsome indeed. The problem, of course, is the timing. Using traditional methodologies, it’s practically impossible to reliably forecast future trajectories.
Arguably, though, by shifting the framework and our assumptions, we can get a better idea of what may lie next. It’s my opinion that SOUN stock is due for a bounce higher but potentially only for this week; hence, the warning up top.
Primarily, the impediment to the forecasting rigor of traditional technical analysis comes down to the discipline’s reliance on continuous-time signal processing frameworks. That’s not to say that technical analysis is useless. Certainly, many investors and traders use the underlying methodologies to great financial success.
Nevertheless, a key characteristic of technical analysis — and even fundamental analysis if you think about it — is the production of so-called floating-point outputs. These change constantly, and therefore, in the absence of discrete states, it’s practically impossible to isolate conditions, compare such conditions cleanly across time and build outcome probabilities with confidence.
Where the lines often get muddied for consumers of financial publications is that many analysts will often distribute discrete conclusions based off continuous analyses — for example, a “good” time to buy. However, there is no such thing as a “good” stock price or a “bad” revenue. These metrics are simply scalar realities.
In order to extract a discrete outcome, an analyst needs to apply a process called abstraction. From there, useful patterns may materialize via a discrete-event analysis utilizing modified first-order Markov models. With this analysis, I noted that SOUN stock is currently riding a three-week up, seven-week down (3-7) sequence, a sequence that rarely materializes (about 10% to 13% of the time).
At the same time, this 3-7 formation yields strong directional bias. Of the times when this signal flashed, SOUN stock popped higher in the subsequent week 72.22% of the time, with a median return of 13.58%.
Before you hit the “buy” button, you should be aware that the median returns from the second week through the fifth week. This communicates to me that SOUN stock may be good for a strong pop — and that might be it. You’ll want to think carefully about holding the equity longer than that.
For those who want to take a shot, the 7.50/8.50 bull call spread expiring this Friday may be an interesting wager with loose pocket change. This transaction involves buying the $7.50 call at an ask of $79 and simultaneously selling the $8.50 call at a bid of $16, resulting in a net debit paid of $63.
Should SOUN stock rise through the short strike price of $8.50 at expiration, the maximum reward is $37, or a payout of 58.73%.
