It is no secret that stocks are prone to sudden moves in either direction. This could be triggered by economic data, geopolitical events, stock-specific news, or market sentiment.
Trading such volatile stocks are usually considered a high-risk-high-reward venture. Many traders opt to stay out of the trade rather than risk a loss. However, careful analysis of the charts could help you to enter at the right levels, thereby limiting risk to an extent.
With this in mind, we have started a new weekly series on the trending stock of the week —stocks that are featured heavily in the news.
This week’s stock pick is Twitter NYSE: TWTR, the social networking service that allows users to post and interact with messages known as “tweets.”. Twitter competes with the likes of FANG stock Facebook (FB) and re-emergent Snap (SNAP).
Why is TWTR trending?
Twitter had reported better-than-expected Q3 results, despite weak user growth. Driven by a rebound in advertising demand, the company’s revenue surged 14% to $936 million, above consensus of $777 million, in the most recent quarter reported on Oct. 29.
However, the company’s shares recently dived as investors responded to Twitter’s ejection of outgoing President Donald Trump. The company confirmed its decision in a blog post on Friday, saying Trump’s tweets breached policies by risking incitement to violence, citing his posts on the riots in the U.S. capital last week.
Here’s how to trade TWTR right now.
On analysis of the daily chart of TWTR, the overall trend of the stock seems to be up. There are also bullish indications on the daily chart of TWTR.
#1 Unbroken Uptrend: The daily chart shows that the stock’s uptrend is unbroken, as it has been forming higher highs and higher lows for the past several months. This uptrend line has been marked as a purple color line. The stock had taken support near this trendline multiple times before bouncing higher again. These bouncebacks from the trendline are marked as pink color ellipses in the daily chart.
#2 Price Above MA: The stock is currently above its 200-day SMA, indicating that the bulls are still in control.
#3 Oversold RSI: The daily chart shows that the Relative Strength Index is currently near oversold levels. This indicates that a reversal may be imminent.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the buy level for TWTR is between the price of $45.50 and $50.00. This is marked as a green color dotted lines in the daily chart.
Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.
TP: Our target prices are $55 and $65 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at $41.50. Note that the stop loss is on a closing basis.
Target Upside: Our target potential upside is 17% to 38% in the next 3-6 months.
Entry near $47: For a risk of $5.50, our first target reward is $8.00 and the second target reward is $18.00. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers 2x to 3x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend if it breaks down from the trendline support with high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.
Recommended Bearish Trade (based on the chart)
In case the stock breaks down with very high volume from the trendline support and closes below the previous pivot low, it could point to an upcoming short-term correction. In that case, below are the entry levels, stop loss levels, and target prices.
Sell Level: You can take short positions on TWTR if it closes below the previous pivot low, at a price of around $39.00. This sell level is marked as a red color dotted line in the chart.
Important Note: Make sure that you only enter the trade once the daily close is below the recommended price level.
TP: Our target prices are $35 and $30 in the next 3-6 months.
SL: To limit risk, place a stop loss at $41.20. Note that this stop loss is on a closing basis.
Our target potential downside is 10% to 23% in the next 3-6 months.
For a risk of $2.20, our first target reward is $4.00 and the second target reward is $9.00. This is a nearly 1:2 and 1:4 risk-reward trade
In other words, this trade offers nearly 2x to 4x rewards compared to the risks.
Risks to Consider: The stock may reverse its overall trend if it breaks upwards with high volume. The breakout of the stock could be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.
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