Since the beginning of the bull market in 2009, Synopsys Inc. (SNPS) is a stock that has perform in line with the Nasdaq Composite Index until early 2016. Since February 2016, SNPS has accelerated well outside of the historical trend for the stock. While there are many fundamental reasons for excessive gains in the last two years, the gains are still excessive and therefore should, at minimum, revert to the mean.
The challenge with reversion to the mean is that the stock price will likely overshoot on the downside. With this in mind we have provided the Speed Resistance Lines indicating the conservative, mid range, and extreme price targets below.
So what is mean reversion in this chart? Based on the trajectory of the stock price, we’d say that the mean is the difference between the high in the stock price and the conservative downside target of $48.39. That level would bring the stock price down to $64.55. However, as we’ve said, the tendency is for the price, whenever it falls in earnest, to overshoot on the downside. That’s what makes the conservative downside target of $48.39 a likely level to watch for.