Darktrace shares face biggest test on Wednesday

The FTSE 100's newest member faces a major test on Wednesday when IPO investors are finally allowed to sell their shares. Independent analyst Alistair Strang explains what could happen.

(pictured above: Queen Elizabeth II greets Microsoft co-founder Bill Gate and Darktrace’s co-founder and CEO Poppy Gustafsson [right])

It’s a bit of a surprise seeing Darktrace (LSE:DARK) joining the FTSE 100 so quickly following their launch. Perhaps doubly so, due to the company shares being under a ‘No Sell’ moratorium, or lock-up, for those who bought at the launch when they were just 250p.

Currently at 681p, the moratorium expires on Wednesday this week, when there will doubtless be frenetic activity to take some profit, if only due to price movements in the last week.

Of course, matters have not been helped by a suspicion that their 4x rise in six months [the shares peaked at over 1,000p last month] was perhaps optimistic.

A firm of City brokers issued a note to the media, entitled “Reality Check”, warning of a disconnect between the company value and its growth prospects. The note also, perhaps spitefully, mentioned some clients of Darktrace describe their technology as “snake oil”.

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While this sort of thing may often be justified, especially in a marketplace where buzzwords like “crypto”, “game theory” and “blockchain” are used to conceal the salient detail a product is overhyped nonsense, the pedigree of the folk behind Darktrace should give pause for thought. After all, with security specialists escaping from GCHQ counted among the brains, some respect for the company should be justified.

The big question is how low should the share price be expected to fall, should there be a rush to ‘take profits’ this week?

Source: Trends and Targets. Past performance is not a guide to future performance

If we extrapolate on the company share price behaviour since June, the immediate situation suggests weakness below 668p should permit reversal down to an initial 574p. Should such a level break, bottom should hopefully occur at 511p, providing a bounce and still producing a ‘nice little earner’ for those initial investors who retain their shares.

We can predict a pretty nasty problem should the company share price close a session below 511p. In such an event, continued reversal will enjoy a “Big Picture narrative, justifying travel down to 268p, virtually a break-even level for initial investors.

This price becomes extremely dangerous, obviously psychologically capable of providing a bounce but, unfortunately, also residing in a movement cycle where the Big Picture calculates with an ultimate bottom down at 116p.

We cannot calculate below such a level and, to be fair, it’s difficult to imagine such a recently listed company, a member of the FTSE 100, finding itself in such a position where its share price could experience so much damage.

Our suspicion is to anticipate 511p making an appearance sometime soon. Currently, the share needs better than 800p to escape this misery.