Shares of payment and point-of-sales services provider Square (NYSE:SQ) are higher by around 150% for the year-to-date and to this day continue to reward both investors long the stock or chart chasers playing for higher highs. While the underlying growth story in Square may remain intact, SQ stock on the charts is increasingly at risk of a mean-reversion move lower.
One of the major causes for analysis paralysis on the part of both retail as well as professional investors in my eye is not being able to distinguish between a stock’s fundamental story and its near-to-intermediate-term chart. Shares of Square offer a perfect example at present.
SQ stock is up big so far in 2018, and since the second half of August alone has rallied more than 20%. This very simply put has pushed the stock into a parabolic incline where chart chasers, immediate gratification players and “momentum traders,” as well as algorithms, are constantly playing the stock for higher highs.
SQ Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the multiyear weekly chart, we see that since early 2017, SQ stock has steadily increased the slope of its incline, so much so that the most recent rally in August has now finally taken its chart into vertical overshooting mode. These type of vertical ascents always lead to either a sharp snap-back, i.e. mean reversion move lower (or at least to a sideways consolidation phase). Either way, these blast-offs are not sustainable at these rates of incline, particularly not after in the case of SQ stock, an already sharp rally leading up to the vertical move.
This parabolic move, however crazy it might look, may however not have much if anything to do with the stock’s longer-term fundamental outlook. In other words, just because SQ stock may now have good odds of a mean-reversion move to the downside does not mean its longer-term growth outlook all of a sudden is in jeopardy.
Likewise, a bullish longer-term investor should (all else being equal) not necessarily be tempted to buy into a vertical chart such as this one for he/she may almost definitely get better entry points in the near to intermediate term.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that SQ stock as a result of the steep August rally now trades 70% above its red 200-day simple moving average. This also has its MACD momentum oscillator at the bottom of the chart in record overbought territory. While the stock can still squeeze higher in the near term, the odds of a continued ascent at this recent rate are notably low.
Active investors and traders now will want to wait for a bearish reversal day, i.e. a day where the stock has a notable failed intraday rally to either take near-term profits on longs or leg into quick short positions. A first downside target is $85.
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