by Serge Berger | May 7, 2014 8:13 am
Twitter (TWTR) is a stock that has been hotly debated over the past few weeks, and particularly yesterday after Twitter stock was sold into the abyss as a result of the lock-up expiration day.
While some long-term bulls argued over the perceived value in Twitter stock, those with a more medium term time-frame took a less optimistic approach. And short-term traders were calling for an oversold bounce in TWTR.
Before we go to the charts, there’s a lesson to pick up here:
When it comes to trading, it’s important to understand the time frame you’re operating in. Many debates over a stock’s direction could have been avoided if only the intended time frames of the trade been clearly laid out.
The same goes for trading “styles,” where some people like to buy breakouts or short breakdowns, while others like to buy on a perceived support area or short at a resistance area. It is difficult to argue with a stylistic approach.
What really matters at the end of the of the day, this is a game of risk management, not having to be right all the time.
Back to Tuesday: Twitter stock finished the day down 17.8%, closing at fresh all-time trading lows. The selling came on a gigantic spike in volume both in TWTR stock as well as in the options traded, although a roughly equal amount of puts and calls were traded on the day.
Over the past few weeks, Twitter stock has put an increasing amount of pressure on its November 2013 lows, and on Tuesday those lows were clearly and violently broken.
This brings us to time frames.
For medium- to longer-term investors, trying to catch a falling knife is rarely a high-probability strategy. Which is to say, building a full investment position all at once after yesterday’s drop isn’t; a good idea, regardless of whether yesterday’s lows in Twitter stock turn out to be important longer-term lows.
Through a technical lens, TWTR would now need to begin a bottoming formation for the medium- and longer-term investors to have a better downside reference price area to lean against.
For the quicker hitters, however, an oversold bounce might soon be in the cards for TWTR, and here it’s important to pay attention to the closer-up picture.
To measure the near-term oversold/overbought readings for a stock, among other things I like to use the eight- and 21-day simple moving averages, which on the below chart are represented in blue and yellow, respectively. Tuesday’s no-mercy selling has in the immediate-term stretched Twitter stock well below its eight-day moving average, and that’s something that more often than now tends to mean-revert, which in the case of TWTR could call for an oversold bounce.
The more agile trader and investor thus can today watch how Twitter stock reacts in the first 30 to 60 minutes of trading. If a quick reversal off the morning lows sticks, or if an up-gap at the open sticks, a trade vs. yesterday’s lows or this morning’s lows (whichever is lower) to the long side could present itself.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
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