Shares of payment solutions provider Square Inc (NYSE:SQ) dropped another nearly 5% yesterday, bringing its drop since the Nov. 22 highs to roughly 27%, i.e. nearing the 30% correction mark. Although still too early to buy, SQ stock as a result is now coming closer to a buy entry point to yours truly.
As a point of reference, when I last mused about Square Inc on Nov. 28 I offered that the stock had just begun a desperately needed mean-reversion process as it was hopelessly overbought in the near-term: “the mean-reversion process has now begun” and “I see this stock ultimately mean-reverting back down into the mid to high $30s (say the $35-$37 range)” before a better buying opportunity can come about.
Since then, the stock has indeed dropped another 12%, much in line with my thinking.
To be clear, I still see a bright future for many of the payment services, including Square as well as outfits such as Paypal Holdings Inc (NASDAQ:PYPL), but those longer-term views must be clearly separated from the near-term gyrations. In other words, just because I like a stock’s growth prospects does not mean I have to buy it at any price in the near-term, particularly not into parabolic rallies.
SQ Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the multiyear weekly chart, we see that the corrective move of late has also brought SQ stock back to the upper line of the 15-month trend, although from a momentum perspective the stock remains vastly overbought.
Before entering new long positions in SQ stock, I now need to see some stabilization followed by confirmation of buying, i.e. a so called bullish reversal.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that my proprietary TST Vertical X Pro indicator (red down arrows) on Nov. 22 perfectly signaled the overbought levels in SQ stock, just like it did earlier this year both in March and in August when the stock then slipped into consolidation phases. While this was not my sole reason for calling a much-needed pause in the rally on Nov. 28, it certainly was a good part of the input.
With yesterday’s drop, SQ stock has now also sliced through its yellow 50-day moving average and the stock looks likely to move toward the lower end of my downside price target near $35.
Although the stock could easily see a downside price movement into the low $30s and toward the blue 100-day simple moving average, given my aforementioned analysis I no longer see good reward-to-risk for the stock on the downside.
Rather, I would be looking to buy into any strong bullish reversals, i.e. exhaustion selling followed by a clear and solid buying day. Once a bullish reversal has taken hold I will once again play SQ stock from the long side with a first upside price target in the low $40s.
Check out Anthony Mirhaydari’s Daily Market Outlook for Dec. 14.
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