It has been very hip to be long Square (NYSE:SQ) stock these past few weeks. Now, however, it’s time to consider being less trendy and waiting for a less carefree pullback that’s making increasingly good sense off and on the price chart. Let me explain.
For bullish investors it has been a wonderful few weeks since I last wrote about SQ stock. Interest rate optimism and lesser U.S. China trade war saber rattling have allowed the broad-based, large cap S&P 500 and tech-heavy Nasdaq indices to climb by 4.5% and 7%, respectively, to marginally fresh highs. But it gets even better for SQ stock investors.
Over this same period, Square stock has rocketed higher by 20% while building the right side of a very constructive-looking corrective base on the price chart. It’s all good, right? Longer-term, I remain optimistic. But in the short-term, the risks have also increased for bullish investors.
SQ’s earnings are out in two weeks and the last time the company delivered its results, investors were far from happy. A mixed report failed to live up to expectations, which led to shares getting hammered by an immediate 8%, then continuing to outpace the broader markets on the downside during May’s broad-based corrective selloff.
But following Square stock’s rally this past month, shares are nearly 11% above last quarter’s post-earnings confessional. Furthermore, what many had viewed as a pricey growth play has become even more expensive with today’s forward price-to-earnings ratio of 74 and PEG ratio of 2.24. By comparison, peer PayPal (NASDAQ:PYPL) trades at 34x forward earnings and a PEG ratio of 1.98.
Today, the price of SQ stock has less margin for error to keep Wall Street happy. And on the price chart, shares are warning investors that pressing the transaction button to buy SQ is likely to come with an undesirable late penalty fee of sorts.
SQ Stock Weekly Chart
Click to EnlargeI’m a fan of larger constructive bases like Square’s generally setting the stage for higher prices. But for timing purposes, a pattern breakout through Square’s February mid-pivot high of $84.66 within this particular double-bottom pattern is at increased risk of being a difficult entry point for bullish investors.
An overbought daily and weekly chart stochastics indicator and price action outside both SQ chart’s Bollinger Bands stresses the heightened likelihood of a pullback or even a failed breakout. In either scenario breakout buyers will be faced with paying too much for shares in the near-term and quite possibly a loss if the pattern entry is managed with a technical exit to minimize exposure.
A quick look at a lopsided crop of bullish articles penned recently at InvestorPlace, also gives me reason to think the strong price action in SQ stock won’t continue without some challenges. I’m agreeable with most of the optimism, such as Luke Lango’s article at InvestorPlace this past week. Still, from a trading vantage point, it’s another warning sign shares of Square are more prone to downside risk than otherwise.
My suggestion for SQ is to simply wait for a pullback that’s strong enough to remove today’s rampant bullishness in shares while keeping the integrity of the pattern intact. Technically, I’d like to see $77 hold during a pullback without questioning the durability of this particular base. As such, that’s my line in the sand if an opportunity to buy Square stock on weakness unveils itself over the coming couple of weeks.
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 market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.