Twitter Inc (NYSE:TWTR) is in trouble. The company’s recent limited success with live streaming and its quest to morph its business model into a live TV for the Internet have led to inflated prices in TWTR stock and excessive exuberance in the financial media.
That’s not to say that the company’s shift toward streaming is ill fated or wrong, but rather, Twitter traders are getting ahead of themselves, and it’s starting to show in the technicals.
Specifically, Twitter stock is facing a potentially dangerous short-term head-and-shoulders formation.
The late April surge in Twitter shares led to a minor plateau just above $18, with TWTR eventually breaking out to a peak near $20 on May 16. The shares were rejected immediately, and a subsequent test of support at $18 failed, leading to what could be the final resolution of this bearish technical formation.
The downside risks could see TWTR stock break support at its 200-day moving average, and even it’s 50-day trendline near $16.70, setting up a return trip to $16 or below before the shares finally recover.
There are some caveats to this technical setup, but they are long shots.
First, analysts have remained largely on the sidelines. According to Thomson/First Call, 32 of the 35 analysts following the shares rate them a “hold” or worse, leaving room for potential upgrades as brokerage firms digest the potential for Twitter’s live streaming initiatives.
There is also the potential for price-target increases following the same logic, as the 12-month consensus price target currently rests at $14.76 — a significant discount to Twitter’s current perch north of $17.50. However, if recent bullish news wasn’t enough to budge these naysayers, upgrades likely won’t happen any time soon.
Then there is the overly bullish outlook in the options pits. Currently, the July put/call open interest ratio comes in at a reading of 0.52, with calls practically doubling puts among options set to expire next month. This ratio is more bullish than roughly 70% of all those taken in the past year, and is indicative of heavy optimism toward TWTR stock. In short, options traders are not expecting a decline, and could be blindsided by a technical breakdown in the shares.
Overall, July implieds are pricing in a potential move of about 7.25% for Twitter ahead of expiration. This places the upper bound at $18.77, just shy of the stock’s May highs, and the lower bound at $16.23, well below near-term trendline support levels.
From here, I have two trade ideas for Twitter.
2 Trades for TWTR Stock
Put Spread: With the potential for heavy short-term losses if the head-and-shoulders technical formation follows through, Twitter shares could be headed to $16 in short order — especially with analysts largely indifferent and options traders not anticipating the decline. Traders looking to profit from such a breakdown might want to consider a July $16/$17 bear put spread.
At last check, this spread was offered at 30 cents, or $30 per pair of contracts. Breakeven lies at $16.70, while a maximum profit of 70 cents, or $70 per pair of contracts, is possible if TWTR stock closes at or below $16 when July options expire.
Call Spread: On the other hand, it’s hard to predict how, if, or when the brokerage community will finally weigh in on Twitter’s push into live streaming TV. There is certainly potential for upgrades and/or target increases that could break the head-and-shoulders pattern forming for Twitter and send the shares higher.
While my money is on a near-term decline, bullish Twitter traders might consider a July $18/$19 bull call spread.
At last check, this spread was offered at 30 cents, or $30 per pair of contracts. Breakeven lies at $18.30, while a maximum profit of 70 cents, or $70 per pair of contracts, is possible if TWTR stock closes at or above $19 when July options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
