Shares of payment solutions provider Square Inc (NYSE:SQ) into last week’s highs had risen a stunning 260% for 2017. This all came to a crashing halt on Monday as an analyst downgrade resulted in a snowballing motion of traders hitting the exit button.
After it was all said and done on Monday SQ stock lost 16% and closed near the very lows of the day.
While it is not my style to jump on the back of analyst up- or downgrades, I have been waiting to get off a trade to the short side in SQ … or at least find a better reward-to-risk level to buy the stock for an intermediate- to longer-term play.
So you know, I believe in the long-term story of Square as a payment service as much as I like Paypal Holdings Inc (NASDAQ:PYPL), but a good portion of Square’s recent rally has been on the back of the bitcoin momentum, as the company is moving to allow its users trade bitcoin through its app.
As a result of this, SQ stock has gone vertical in recent weeks and, as I always tell my clients and clubhouse members, what goes up must come down, i.e. mean reversion moves are inevitable once a move becomes too exacerbated.
SQ Stock Charts
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
Looking at the two-year chart of SQ stock, we see that the rally in recent months led in a massive diversion from its medium-term moving averages. The MACD momentum oscillator at the bottom of the chart as a result jumped to silly overbought readings.
With Monday’s move, the mean-reversion process has now begun.
Moving averages legend: red – blue – 8 day, yellow – 21 day
Monday’s move all in one day mean-reverted SQ stock back to its yellow 21-day simple moving average, which had acted as stellar support over the past few months.
Around midday on Monday when the stock was trading in the mid $40s, I sent out a real-time trade alert to my clubhouse members, saying that the next downside target is closer to the $40 mark. The stock closed Monday near $41 and has thus come very close already to my first downside price target.
However, a sell-off of this magnitude is rarely over in one day, which is to say that I now see this stock ultimately mean-reverting back down into the mid to high $30s (say the $35-$37 range).
While SQ is a volatile puppy and could easily jump 5% or more in the immediate term, I see it gravitating lower still from Monday’s close over the ensuing weeks.
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Source: Investor Place