Trade of the Day: Square Inc Feels the Reality of Gravity

It's too early to buy Square stock after Monday's beat-down

By Serge Berger, InvestorPlace Contributor

Shares of payment solutions provider Square Inc (NYSE:SQ) into last week’s highs had risen a stunning 260% for 2017. This all came to a crashing halt on Monday as an analyst downgrade resulted in a snowballing motion of traders hitting the exit button. After it was all said and done on Monday SQ stock lost 16% and closed near the very lows of the day. Barring a very sharp reversal of fortune, SQ stock now looks to have further to slide until better reward to risk opportunities arise.

While it is not my style to jump on the back of analyst up- or downgrades, I have been waiting to get off a trade to the short side in SQ … or at least find a  better reward-to-risk level to buy the stock for an intermediate- to longer-term play.

So you know, I believe in the long-term story of Square as a payment service as much as I like Paypal Holdings Inc (NASDAQ:PYPL), but a good portion of Square’s recent rally has been on the back of the bitcoin momentum, as the company is moving to allow its users trade bitcoin through its app.

As a result of this, SQ stock has gone vertical in recent weeks and, as I always tell my clients and clubhouse members, what goes up must come down, i.e. mean reversion moves are inevitable once a move becomes too exacerbated.

SQ Stock Charts

Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

Looking at the two-year chart of SQ stock, we see that the rally in recent months led in a massive diversion from its medium-term moving averages. The MACD momentum oscillator at the bottom of the chart as a result jumped to silly overbought readings.

With Monday’s move, the mean-reversion process has now begun.

Click to Enlarge

Moving averages legend: red – blue – 8 day, yellow – 21 day

Monday’s move all in one day mean-reverted SQ stock back to its yellow 21-day simple moving average, which had acted as stellar support over the past few months.

Around midday on Monday when the stock was trading in the mid $40s, I sent out a real-time trade alert to my clubhouse members, saying that the next downside target is closer to the $40 mark. The stock closed Monday near $41 and  has thus come very close already to my first downside price target.

However, a sell-off of this magnitude is rarely over in one day, which is to say that I now see this stock ultimately mean-reverting back down into the mid to high $30s (say the $35-$37 range).

While SQ is a volatile puppy and could easily jump 5% or more in the immediate term, I see it gravitating lower still from Monday’s close over the ensuing weeks.

Check out Anthony Mirhaydari’s Daily Market Outlook for Nov. 28.

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