Following recent varied earnings reports and reactions by Wall Street, internet stocks Zillow (NASDAQ:Z) and Twitter (NYSE:TWTR) are setting up for a well-placed pairs trade.
Let me explain.
I’ve said it before and I’ll say it again, earnings can be a tough trade for investors to play. And internet stocks running the gamut from Amazon (NASDAQ:AMZN) to Snap (NYSE:SNAP) and all the names in-between like Zillow stock and Twitter stock are more likely to keep that difficult earnings trend intact than not.
But there are those occasions when Wall Street’s appreciative enthusiasm on the price chart aligns itself with the quarterly confessional. And in some instances the two factors set up a solid post-earnings opportunity to trade the trend with more confidence. This appears to be the situation in Zillow stock and Twitter stock. Bearing that in mind, let’s take a look at both internet stocks and make the case for why going long Zillow stock and short Twitter stock post-earnings makes increased sense in today’s market.
Internet Stock Pairs Trade Long: Zillow Stock
Click to Enlarge
The long position within our internet stock pairs trade belongs to real estate services company Zillow. Last Thursday, Z stock reported an earnings beat and profit of one cent per share compared to Street estimates of break-even.
Zillow stock also managed to deliver stronger-than-forecasted year-over-year total sales growth of 29% and issued above-views revenue guidance to round out the quarterly confessional.
For its part, Wall Street applauded Z’s results and sent shares surging higher by more than 26% toward the coveted upper right quadrant of the price chart. Now and nearly a week later, Zillow stock is ready for purchase as part of our internet stocks pairs trade.
Over the past week, Zillow stock has consolidated its short-term overbought condition following the earnings reaction. The ensuing price action has established a nice-looking simple pullback pattern, which found resistance as shares challenged the 200-day simple moving average and 50% retracement level.
This makes buying Z’s constructive weakness now a practical way to enter the position.
Internet Stock Pairs Trade Short: Twitter Stock
Click to Enlarge
I’m confident readers have heard the saying about someone or some entity being head-and-shoulders above the rest? It’s a reference promoting a superior position. Conversely, following TWTR’s earnings from two weeks ago, investors have a company failing to live up to that standard, as well as the basis for a short position within our internet stocks pairs trade.
On the surface, Twitter stock did great with its large profit and sales beat. But that was as good as it would get for TWTR bulls.
Shares of Twitter stock tanked nearly 10% in the report’s immediate aftermath as monthly average user (MAU) growth concerns, weak revenue guidance and the company’s warning of sharper expenses trumped any would-be bullish enthusiasm. Ironically enough, on the price chart, Twitter stock is sporting an equally determined, but bearish pattern known as a head-and-shoulders formation.
Twitter stock’s bearish earnings reaction confirmed a pivot high within the pattern’s right shoulder. Now, two weeks removed from the report, it’s time to place a short in this internet stock as part of a pairs trade with Zillow stock.
The bottom line for Twitter stock is that it has failed to challenge the bearish earnings move in any meaningful way despite the broader market making fresh relative highs. And with this kind of head and shoulders dictating a superior position for bearish traders, fresh, relative and even multi-year lows appear to be right around the corner for shares of TWTR.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.
