Square (NYSE:SQ) stock had many more fans on Wall Street just a few months ago.But for months, SQ stock has been in a negative trend — down 40% from the October highs. Nevertheless, SQ stock remains up 10% for the year, which is in line with the Financial Select Sector SPDR Fund (NYSEARCA:XLF) and just four points below the S&P 500.
The bigger problem for SQ is that it is also lagging its competitors. MasterCard (NYSE:MA) is up 45%, Visa (NYSE:V) up 35%, while PayPal (NASDAQ:PYPL) and American Express (NYSE:AXP) are each up 25%. Clearly Square stock has some work to do, but therein lies the opportunity.
They say that stocks don’t ring bells on tops or bottoms. This is more true in the case of Square stock since it always carries momentum. Meaning when it moves, it does it fast in either direction. This makes it scary to catch it when it’s a proverbial falling knife.
Fundamentally, the prospects for SQ have not changed. The company is still set in an exciting area of business. The financial technology stocks like this have a long-term rising demand curve. The whole world is in a trend to migrate all financial transactions to digital. This movement gained steam from the popularity of Bitcoin and its blockchain technology.
Since we know that the SQ products and services will remain in demand for years, it’s safe to assume that Square stock should also do well. Only management flubs or a market-wide crashes could changed that in the short to mid term.
SQ Stock Has Upside Opportunity
Square stock still has technical opportunities and pitfalls to help guide the timing down here. If SQ falls below $60.50 per share it could trigger a bearish pattern worth another $6 decrease from there. While this is not a forecast it’s a realistic scenario that is just below current levels. If that happens then it would make the argument much stronger to go long SQ.
Conversely, if the bulls can break above $67 per share they could launch a rally to fill the gap to $69 but also the bigger one all the way to $78. Clearly there are several resistance levels along the way starting at $65. Each of them are milestones for the bulls.
So far, SQ has been shy about taking advantage of breakout setups. It had at least two great positions this year but they both failed in a big way. The earnings reactions in March and August were perfect setups for a major breakout but alas for the bulls the investors reacted negatively to what management delivered.
So the concern here for SQ stock is stabilization first then worry about rallies. Buying the dip of it has worked better than trying to time a spike. So at the first sign of the S&P stabilizing, SQ would make for a good bounce trade off the lows and exit at the breakout line until this pattern breaks.
Fundamentally, SQ stock is not cheap as it still loses money and sells at 8 times sales. Since it is a growth stock, Wall Street allows it a lot of slack on the profitability line. So this for now is okay as long as management doesn’t disappoint on sales forecasts.
In short, fintech stocks are going to thrive for years to come so this bodes well for SQ stock. So in spite of the geopolitical distractions here, demand for SQ services will persist.
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. Join his live chat room for free here.
