They’re out of favor on Wall Street, but don’t discount market leaders Square (NYSE:SQ) and Spotify (NYSE:SPOT). Following deeper pullbacks, both SQ stock and SPOT stock are in position to have investors pull out their wallets and sing their praises again.
It has been a difficult month for the market with the S&P 500 losing roughly 4.25% as of Wednesday’s close since establishing its late July all-time high. And it has been worse for mobile payments champion SQ stock and streaming music giant SPOT.
Square shares are off 25% since hitting its own relative at the start of August. SPOT has done a bit better. Similarly, its loss of 18% over the same period has been a tough one to say the least.
Sure, both SPOT and SQ managed to underwhelm or disappoint Wall Street in one way or another with earnings reports that can be attributed to the larger price hits. But Wall Street has a knack for forgiving, forgetting, or both. And that’s not all.
The fact remains both companies continue to grow strongly and remain leaders in their respective markets. But there are other reasons on the price charts to believe SQ stock and SPOT stock can regain their technical composure.
Shares of SPY are up handily in Thursday’s early trade as a softer and less hostile tone in trade talks between the U.S. and China emerged. We know how that type of headline goes these days. Nevertheless, the fact remains the market has established a historically robust bottoming pattern known as the follow-through day amid all the volatility of the past few weeks.
It’s also true, while under-performing the market in spades, both SQ stock and Spotify have put together their own strong-looking bottoms worthy of your investment consideration.
Pullback to Buy #1: SQ Stock
Square stock is the first of our two deep pullbacks to buy. Mixed earnings throttled Square by dismantling a cup-with-handle breakout attempt within a larger weekly corrective base. And a bit of follow-through broke angular support off December’s ubiquitous market bottom. But that could be the end of the bad news for Square bulls.
The daily chart is forming a potential small double bottom pattern centered on the 62% retracement level. As this price formation could also establish a slightly higher low relative to SQ stock’s June pivot—Square is in a strong position for buying.
Square Stock Strategy
My recommendation is to allow SQ stock to confirm the bottoming pattern and allow a bit of wiggle room by trading above its 3-day high of $63.52 before considering a purchase. In sticking to the pattern and appreciating that a failure could get ugly, I’d suggest exiting on a new closing low which undercuts $61.75.
Pullback to Buy #2: SPOT Stock
The second of our two pullback patterns to buy is SPOT stock. Unlike Square, investors did rally behind Spotify’s earnings report, albeit ever so briefly. The good news is the ensuing pressure in SPOT over the past month has allowed shares to test a nice-looking area of technical support worth buying.
Currently, SPOT stock is challenging the angular support line which failed shares of Square. The relative display of strength also has the 50% retracement level backing the possibility for a higher low to emerge. Lastly, today’s testing also has an oversold stochastics setup which is just now crossing over and beginning to curl higher.
Spotify Stock Strategy
For buying SPOT stock my suggestion is to simply purchase the bullish price confirmation of Wednesday’s hammer candlestick. It’s not a picture-perfect entry relative to a purchase through $133.61. Still, with a recommended stop-loss beneath $129.61 and exposure of less than 5%, risks both off and on the price chart are in perfect harmony.
Investment accounts under Christopher Tyler’s management do not 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.