Twitter (NYSE: TWTR) is ubiquitous in the online lives of millions, yet its stock has been the bane of many a portfolio.
After a strong performance following its initial public offering in 2013, it's been a tough slog. The stock fell from a peak near $75 to an all-time low of $15.48 on Thursday.
While there have been false reversals along the way, this week's reversal seems like it just might have a chance of making traders quick double-digit profits.
The latest leg lower, which began in October, started to accelerate in the new year along with the broader market's sell-off. But on Jan. 20, Twitter scored a rather substantial, albeit imperfect, reversal to the upside.
I say "imperfect" because the stock closed in the middle of the day's range. Still, it set a lower low and closed with a net gain on the day with big volume. So we have to respect the sudden bullish change of heart. The broader market also staged an intraday reversal that day, although it closed with a significant loss.
Rumors that News Corporation (NYSE: NWS) was taking a stake in the company can take some of the credit for the rally even though they were later denied.
Predictably, Twitter opened weak the next day, but it managed to close with a decent gain. If the takeover rumors were so off base, we'd expect the stock to trade back closer to its pre-rumor levels. Instead, talk of Twitter being better off as part of another company has not died down. And its low share price keeps the potential high for an activist investor to make some waves.
But technicals are my mandate, and the bullish reversal with heavy volume and oversold momentum conditions makes this an interesting long-side play. Plus, shares are trading more than 40% below their 200-day moving average, which even for a stock in a bear market is quite stretched.
Combine all of these factors and we can make a case for a bounce, perhaps back to the 50-day moving average. Consider it a mini-reversion to the mean event, but percentage-wise an upside correction could be rather enticing.
The 50-day is near $23, which is 29% above the current price. I'm setting my target below that at $21.40, which could nab a quick 20% profit.
To round out the analysis, short interest in the stock remains quite high and sentiment is still largely negative. The market rarely accommodates a large majority, although timing when things will change is always tricky.
One final note from a personal point of view: I use Twitter extensively in my work, and it is hard to see an ad or corporate promotion that does not include a "Follow us on Twitter" appeal. The site has a following, but the company has not figured out a way to monetize it. Therein lays the opportunity for new ownership. This stock could hold a takeover premium despite some pundits saying one won't happen until shares drop another 50%.
Famed Fidelity fund manager Peter Lynch told investors to simply look around to see what is successful. Twitter the site seems to be, so it is up to someone to make the company just as successful.
I am not blind to the trend. All I want is to take the other side of a very bearish marketplace for a short-term pop higher -- and then I'm out. I'd also bail if the stock just sits there for a week or so, but I doubt that will happen.
Recommended Trade Setup:
-- Buy TWTR at the market price
-- Set stop-loss at $16.80
-- Set initial price target at $21.40 for a potential 20% gain in two weeks
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This article was originally published on ProfitableTrading.com: This Fallen Stock is Ready for a Quick Pop