Last week ended on a sour note for stock prices. The rally in bonds that the U.S. Federal Reserve started with their uber dovish statement took its toll on the indices. It’s typical that stocks and bonds move inversely to each other.
Among the wreckage on Wall Street, there were a few stocks that still shined. Twitter (NYSE:TWTR) was one that had a strong week while most struggled. Last week’s performance wasn’t a fluke for TWTR, however. Since March 8, TWTR stock has had a 12% rally. So it has momentum on its side and therein lies the opportunity.
There are decent odds for a bigger rally to unfold especially if the markets in general recover from Friday’s weakness.
Technically, TWTR stock behaves well according to the patterns that present themselves. Currently there is technical reason to expect a rally opportunity. But first there are hurdle levels in the way.
First, it is important to remember that TWTR is a momentum stock so it moves fast in both directions. This makes it difficult to trade with strong conviction because it almost never gives a clear signals to determine good entry points.
If the bulls can overcome Friday’s high they can spark the rally and this should invite the first wave of momentum buyers. $35.50 per share is the next zone where sellers might try to stall the move.
But the biggest battle in this opportunity will probably come from the resistance area between $35.50 and $37 per share. That is where the bears have laid out a cluster of failures from last August, October and December. TWTR stock fell more than 15% each time so the sellers would not want to lose the zone without a fight thereby creating resistance.
But the big carrot is the gap above the resistance from the crash that TWTR had on earnings last July. So ideally the target of the opportunity is all the way to $42 per share but the bulls have to take the first steps and those could come this week.
Trading TWTR Stock
Even thought the path upwards seems easy on paper because the levels are well defined, it won’t. TWTR stock still has to fight the tide of a breakout in bonds. Last week, TWTR was able to trade up in spite of the falling stock market, but it probably won’t be able to sustain it.
So this opportunity will be so much greener if indices shrug the spike in bonds this week. My chart has at least two dead vines that I drew from the past two failed patterns. The best opportunity was on December 12th when TWTR had a perfect inverse head and shoulder going. But we all know how the market crashed into Christmas.
The difference is that then, sentiment on Wall Street was horrendous and that is why it’s crucial that investors shrug last week’s selling off and soon. Otherwise, TWTR could have a repeat outcome from last year.
Fundamentally, Twitter stock is not dirt cheap as it sells at a 21x trailing P/E ratio. This is more expensive than Apple (NASDAQ:AAPL) and about as expensive as Facebook (NASDAQ:FB) for reference. And TWTR still has to prove it can sustain a growth rate to justify a premium TWTR stock price.
But for now, the opportunity is one of a technical nature so I can set aside the valuation concerns for now until traders this price battle settles.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
