Is a turnaround finally developing for badly bruised Twitter Inc (NYSE:TWTR)? The long-suffering faithful certainly hope so — and hope is all they have, for the most part. However, there has been some justification for optimism. A few weeks ago, a major hedge fund announced the purchase of 2.9 million shares of TWTR stock. That set alight speculation that the much-rumored buyout of the social media company was back in business.
I don’t mean to be the bearer of bad news, but I’m not the only one. Plenty of smart folks have discussed the fundamental barriers threatening Twitter stock.
Our natural assumption is that after so much bad news, it couldn’t get any worse. But through this reasoning, TWTR has become the Chipotle Mexican Grill, Inc. (NYSE:CMG) of social media. I admire the never-say-die attitude, but the numbers are just not adding up.
TWTR Stock Is Experiencing Technical Difficulties
The technical problems for TWTR stock — and there are plenty — may be more numerous than any one short article can count. I’ll try to hit all the major points. The most glaring and immediate risk is that Twitter stock is charting a bearish head-and-shoulders pattern.
The jury is still out on exactly what the success and failure rate is for technical indicators due primarily to the discipline’s subjective interpretation. However, investment academics have found reasonable consensus that some patterns are more reliable than others.
The head-and-shoulders pattern falls into that category.
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Essentially, the indicator is defined as half-hearted bullishness that never lives up to its promises. This is exactly what we see with Twitter stock. In August of this year, TWTR peaked at a closing price of $20.86 before retreating.
Then, in early October — when enthusiasm was sky-high for a buyout — shares closed at a high of $24.87 before collapsing. We did see a resurgence this month when TWTR stock hit $19.14. But that’s really all she has wrote.
The ultimate trajectory of a head-and-shoulders pattern is of course down. Because of that, I wouldn’t be surprised at all to see TWTR stock drop to a support level between $14 and $15. What gives this forecast more weight is that Twitter stock is presently sandwiched between its 50- and 200-day moving averages.
This consolidation will eventually go somewhere and my bet is southbound. Also, volume levels have been declining while shares were rising to form the “second shoulder” of the pattern. Such contradictions between volume and price action typically resolve badly for the long investor.
Ugly Math for Twitter Stock
Last month, I made a mathematical argument that TWTR stock is a massive basket case. In a nutshell, this is a company that was well overhyped. It received a tremendous boost of enthusiasm shortly after its initial public offering, and that was it.
The overall trajectory of Twitter stock has been decidedly negative. However, its competitor Facebook Inc (NASDAQ:FB) has experienced the opposite circumstance. It was embattled early on, but would later go on to be one of the most reliable market investments.
The lesson at that time was that TWTR is a gamble not dissimilar to a speculative penny stock. Outside of an unexpected buyout or some kind of near-miraculous event, the incentive to buy Twitter stock is virtually nonexistent. Subscriber growth is fading like AMC Networks Inc (NASDAQ:AMCX) is shedding viewership. At some point, the math doesn’t make sense for even the diehard fanatics.
Why buy a problem investment when there are several viable alternatives?
Surprisingly, the math also shows there are more people that are bullish on TWTR stock today than ever before. In the first two years of its “life,” bearish volume — or volume on down days — slightly outweighed bullish volume. But in the last two years, bullish volume has taken the edge. That’s a remarkable shift, considering that the average Twitter stock price fell from $48 in 2013 and 2014 to $26 in 2015 and 2016.
This is a price-volume contradiction inverse to what I mentioned earlier — rising volume, declining price. That opens the door to the possibility of a massive bullish reversal. Or, it could mean that people are taking a very big risk on a narrowing window of opportunity. Indeed, since October, bearish volume outweighs bullish volume by a relatively wide margin.
TWTR Hasn’t Changed
The bottom line is that there are more risks facing TWTR stock than there are potential upside rewards. I respect the contrarian perspective where a steep falloff is sometimes met with a reactionary spike move. I respect the temptation to engage this idea even more.
Clearly, when you look at the short interest, Twitter stock has had much more sustained bearishness this year than at any other point in its history. A brief tailwind could generate a panicked short squeeze.
That boils down to a lot of timing and a lot of luck. What would bother me as a potential buyer — no matter how short or long the time frame — is that TWTR is a stock that needs profoundly great news. Whether that will come or not is a wide-open question mark. Even if it did materialize, how would Wall Street react? Sometimes, positive fundamentals don’t drive stocks the way we would like.
Because of these lingering variables, my opinion remains the same. TWTR stock is an outright gamble. If you go in with this understanding firmly in mind, I wish you the best of luck. But if you have any inkling that Twitter stock might be a legitimate, long-term investment, I would suggest a long, hard look at its deteriorating status.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
