by Serge Berger | December 30, 2013 8:39 am
Amid slow trading in the broader market last Friday, Twitter (TWTR) saw heavy action as it tumbled on the back of an analyst downgrade. Macquarie Capital analyst Ben Schachter said that in his opinion the stock had climbed “too far, too fast,” leading him to lower his rating to a sell, based on over-valuation. At the same time, the analyst said that nothing had fundamentally changed for TWTR stock in recent weeks, but traders and investors none-the-less took the opportunity to hit the sell button and take profits on the stock.
To Schachter’s call of TWTR stock having risen ”too far, too fast” I say “fair enough,” as this plays well into the theme of steep-sloped stocks that I so often discuss with my clients and readership. After all, TWTR stock had nearly doubled this month before Friday’s selloff, and such steep slopes often lead to violent (if only short-lived) corrections in price.
Whether the Macquarie Capital analyst with his call on TWTR stock was merely trying to draw some attention, stir up the headlines and make a name for himself is an entirely different story — and while it’s a possibility that should be kept in the back of the mind, it shouldn’t lead traders to ignore Friday’s price action.
Last Friday’s 13% haircut in TWTR stock caused notable near-term damage on the charts, which we now must revisit with some clear rules in place.
When looking at TWTR stock, the first thing we must understand is that given its short history (since Nov. 7) on the public markets, there isn’t much price action and many levels for traders and investors to focus around. By extension, considering that Twitter is the new kid on the block, it still needs to prove its business model.
Many investors by now have heard of TWTR, yet few of those actually use the Twitter service and thus cannot fully comprehend what it is all about. In a classic example of this, when I attended a holiday party over the weekend, TWTR stock was a hot topic … but when I asked who used Twitter itself, merely two hands raised out of several dozen in the conversation.
On the daily chart below, note that with the trifecta price action from Dec. 24, 26 and 27, TWTR stock completed a nice topping formation. The rally from the 24th was followed by an up-gap open and doji close on the 26th, followed by a down-gap and bearish reversal day on Friday the 27th. Simply put, buyers exhausted on the 26th, and bears quickly took over the court on the 27th.
With this, TWTR has found itself back to its 8-day simple moving average (blue line) a first immediate support area. Given the bearish reversal over the past three trading days, most traders in the multiday/week time frames are now better off waiting for Tiwtter stock to show signs of stabilizing before considering the long side again.
Sometimes, watching from the sidelines is the best trade.
On the 60-minute chart, note that TWTR stock has better support in a confluence area marked by the blue box ($59.60-$62 area), which is made up of lateral support dating back to mid-December (black line), as well as a 61.8% Fibonacci retracement of the rally off the mid-December lows. Particularly given TWTR’s short trading history, traders will need to watch both time frames closely to understand any bottoming process and gauge important price levels in general.
Watch TWTR stock closely in January for trading opportunities, and I will keep you updated through this column as these opportunities come available.
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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities
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