Watch For A Sharp Sell-Off In This Social Media Stock

Friday, October 31, 2014 - 7:30am

by Serge Berger

Social media giant Twitter (NYSE: TWTR) cratered 10% Tuesday despite reporting that revenue more than doubled in the third quarter. Investors were much more concerned with its slowing user growth.

TWTR is a stock that respects its technical parameters, making it ideal for swing traders. Now that earnings are in, there looks to be an opportunity to make quick profits on the short side. 

Revenue of $361 million for the quarter beat analysts' estimates for $351.5 million. Adjusted earnings per share of $0.01 met expectations, and the company raised its guidance for the full year.

But all investors seemed to focus on was user growth. The company added 13 million monthly active users in the quarter, bringing the total to 284 million. This represented a 4.8% year-over-year increase, but was slower than the 6.3% growth seen in the second quarter.

Twitter's most direct competitor, Facebook (NASDAQ: FB), also got punished this week after reporting better-than-expected revenue and earnings but issuing a disappointing outlook.

The fact that both social media stocks gapped down after earnings is noteworthy and portends more weakness in the group. 

I don't advise trading high-momentum stocks like Twitter or Facebook ahead of earnings precisely because of such gaps. But once the news is in, there is often a chance to enter a high-probability trade. 

Looking at TWTR's chart going back to its November 2013 initial public offering, we see the stock managed a 61.8% Fibonacci retracement of the December-to-May decline, where it promptly failed earlier this month.

TWTR Stock Chart

Then came Tuesday's post-earnings sell-off on a huge spike in volume to 83 million shares compared with an average of 28 million. The gap down took shares below their 100-day simple moving average, which has acted as a good reference line for most of 2014. It also cleanly snapped the uptrend line from the May double-bottom.

Zooming in on the daily chart below, we see another breakdown, this time the lateral support (former resistance) line in the $47-$48 area. In retrospect, we can see TWTR began forming an intermediate topping pattern above this line in late August. 

TWTR Stock Chart - Daily

Lastly, and most importantly, Tuesday's selling brought shares back to the top of the unfilled up gap from July 30. 

TWTR is now set up for a straightforward gap-fill trade, whereby any follow-through selling could quickly take it to the bottom of the gap at $38.50 and possibly lower.

Recommended trade Setup:

-- Sell TWTR short at $42 or lower
-- Set stop-loss at $44.60
-- Set initial price target at $38.50 for a potential 8% gain in 2-3 weeks

This article was originally published on This Social Media Stock's Chart Screams, 'Sell!'

Serge Berger does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.