The belle of this year’s momentum ball, Square Inc (NYSE:SQ), finally received its comeuppance Monday. Shares of the hyper-popular mobile payments company fell 16% on record trading volume. Cries of “abandon ship!” were heard echoing through the Street all day long.
Given its gravity-defying levitation in recent weeks, there’s no doubt, SQ stock was due for a pullback. In the two weeks preceding Monday’s meltdown, Square shares were up 33%. That’s a ridiculous addition to its share price in such a short period. Its price chart had gone parabolic suggesting some type of selling pressure would soon materialize.
All it took was a spark to get the bear raid started. And that catalyst arrived in the form of a downgrade by BTIG analyst Mark Palmer.
Here’s the impressive part: For all its fury, all yesterday’s downdraft did was return SQ to its rising 20-day moving average. Not one daily support level was broken. Heck, not even one was tested. So it is entirely too soon to say the uptrend in SQ is dead. For now, this is a pullback and nothing more.
Now, the speed of the descent and the record-breaking volume obviously makes this more than a garden variety retracement.
There’s likely to be an aftershock or two over the coming days. SQ may even need some time to establish a new base before an attempt to reclaim its old heights near $50.
SQ Options Trade
Like most stock crashes, yesterday’s swoon lit a fire under SQ implied volatility. There was a mad dash to bid up option premiums. And now, with an implied volatility rank of 92%, SQ stock options are officially juiced.
If you’re willing to bet Square will remain above $34 over the coming weeks then sell the Jan $34/$31 bull put spread for 45 cents. The initial 45 cent credit is the max profit. The max loss (and cost) is $2.55.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.