Just when it looked like Square (NYSE:SQ) was ready to recover, POW! Square stock tumbled 7.5% on Friday, adding to the 11.5% setback it had suffered on Tuesday of last week in response to a fairly anemic downgrade.
The effort by Square stock to rebound in between the two events was weak, causing matters to officially deteriorate from bad to worse. Yesterday’s close was Square’s lowest finish in months, and it still has room to keep sinking.
Right or wrong, Square looks like it’s fallen into a little more technical trouble than it can handle right now. Buy Square stock at your own risk.
Playing With Fire
Credit has to be given where it’s due. Square saw an opportunity and made something out of nothing.
Credit card payment processors like Fiserv (NASDAQ:FISV) and First Data (NYSE:FDC) had ignored small proprietors for a long time, deeming them not big enough to bother with. Square recognized the advent of the smartphone as an opportunity to successfully, and profitably, penetrate the small-proprietor market, and the rest, as they say, is history.
Investors have been handsomely rewarded in the short time that the company’s been a publicly-traded entity. Square stock is up nearly 600% since its late-2015 IPO, even after the pullback from October’s high.
Every now and then, though, when the underlying story is riveting enough, a rally can take on a life of its own and become self-sustaining. While these moves can be rewarding, they’re also dangerous, as they often end without warning and are followed by a sizable meltdown.
Square stock may have stumbled into such a situation, given its recent technicals.
The daily chart of SQ stock tells part of the story well enough. After peaking in early October, Square stock has fallen all the way back under its 200-day moving average line (depicted by the green line). Indeed, the bulls tried to drag the stock back above that mark a little over a week ago, but a mere kiss of that pivotal line sent the stock to even lower lows.
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The daily chart also hints at a head-and-shoulders pattern that was just completed, with the horizontal floor at $64.76 (depicted by the blue line) serving as the neckline. With Square stock now below that floor, history says it’s going to be tough for the shares to push back above it without dropping further first.
It’s the weekly chart, however, that indicates how close Square stock is to stepping into the quicksand.
Although SQ stock bounced back above its straight-line support four weeks ago and is still technically above it as of right now, the shares are dancing dangerously close to that support level. Throughout its rally for the better part of 18 months, SQ has stayed above that support.
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Also note that the selling volume since the October pullback has been far more robust than any of the buying volume was on the way up. More sellers may be waiting in the wings. If Square stock drops back below its long-term support line one more time, any remaining would-be sellers could emerge.
Square stock doesn’t have another support level anywhere close to that longtime support line.
Plenty of Red Flags
And it’s not as if Square stock bears lack evidence that its results will be less-than-thrilling going forward. Paypal Holdings (NASDAQ:PYPL) announced earlier this year that it was going to acquire Europe’s iZettle, giving it access to the technology that turns smartphones into credit card acceptance machines.
While that intended acquisition is now being questioned by the U.K.’s regulators, if it’s blocked, it’s only a matter of time before a similar deal is made.
In the meantime, similar, built-in payment technologies (like those that can be incorporated into new devices from Apple (NASDAQ:AAPL) and Samsung) are being utilized by small businesses.
While SQ may currently enjoy a lead in serving small businesses, it does not have a wide moat. At least some of the recent weakness of SQ stock stems from the increasingly undeniable reality that SQ isn’t going to be able to simply waltz higher, unchecked by competition.
Investors can use that type of realization to beat a stock down.
The Bottom Line on Square Stock
The good news is that, although the technicals of SQ aren’t good, chart-inspired weakness generally isn’t long-lived.
Traders move in rather predictable patterns, but most sentiment-driven traders have short memories. They’re likely to switch gears sooner rather than later, prompting a reversal.
Keep an eye out for key signals that a major low has been reached, like a massive, high-volume plunge or a slow, well-organized, or well-rounded turnaround move.
But barring a strong market rebound and some surprising good news from SQ, matters will probably get worse for Square stock before they get better.
The stock’s move below the 200-day line has since been solidified, and traders will probably follow through on that bearish move for the foreseeable future. Be cautious.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
