Medium term
Trade view / 17 June 2015 at 13:12 GMT

Twitter set for a bounce...or more

Trader / TheSteadyTrader.com
United States
Instrument: TWTR:xnys
Price target:
Market price:
Background

Social media company Twitter Inc (TWTR:xnys) made headlines again in recent days as news broke that its CEO Dick Costolo will be stepping down as of July 1 and that the company's founder Jack Dorsey will take over as interim CEO. 

Dorsey however, while a great entrepreneur, is not viewed by many to be a good CEO, which was further confirmed on a recent CNBC interview where the lack of communication skills came through. 

After an initial spike last Friday on the back of the news, the stock quickly reversed lower and by its intraday lows on Tuesday had seen a full 10% drop off last Friday's reaction highs. 

The stock now, however, increasingly looks beaten up enough, coupled with better newsflow and options activity, that could support a better bounce in the stock.

Specifically, various rumours circled again on Tuesday that Twitter may soon be either bought or enter a serious strategic partnership. Furthermore, interim CEOs often are put in place as a company transitions for a sale.

In terms of price action, first looking at the chart since the stock's initial public offering in 2013, we see that a clear line of resistance in the mid-$50s is the bigger picture hurdle to overtake, as that is once again where the stock failed in April after it got beaten up after the latest earnings report. 

On the lower end, the stock still has support from the July and December 2014 lows (blue thick line). The most interesting take from the price action is the recent tight but down-trending range since after the initial drop from April.

Twitter monthly chart
Twitter Inc

Source: eSignal

On the daily chart we see this recent trading range better. Note that for the most part the stock has been trading below both its 21- and eight-day simple moving averages for the past weeks, which is getting long in the tooth historically

Next, note that while the stock continued to drop, the RSI index at the bottom of the chart has been making a series of higher lows, thus flashing some positive divergence.

Lastly, Wednesday's intraday selloff pushed the stock below the recent range, only to fully recover and close the day higher by 40 basis points. This bullish reversal at this juncture may be a first sign the stock is ready for a better bounce.

Twitter daily chart
Twitter Inc

Source: Saxo Bank

Management and risk description

From a risk management perspective it is imperative to understand that Twitter stock could remain volatile and that a trade for a bounce against Wednesday's lows may need several attempts. In other words, it may well be possible that a first bounce attempt does not yet come to fruition and that the stock will have one more swoosh lower. 

Good traders understand the odds and that this is a game of probabilities. The odds for this trade are good, but may need some patience.

Parameters

Entry: Buy the CFD at $35.20 or higher.

Stop: $33.40.

Target: $38.00.

Time horizon: 2-5 weeks.

— Edited by Oliver Morrison

For more on equities click here

Non-independent investment research disclaimer applies. Read more
4y
bgold bgold
Great call Serge. Please do keep us posted.
4y
Serge Berger Serge Berger
Thanks, glad you managed to participate. Will keep you updated
4y
Rodrigues Rodrigues
Hi Serger. The stock hit 38 and i didnt sell. Have you sold? What are your thoughs on Twitter going forward? Thanks
4y
Serge Berger Serge Berger
Hi Rodrigues, I sold a part of my position but am still holding. I still think that acquisition or strategic alliance catalyst is out there for now but I would be quick to jump ship if we see a new CEO being hired as that would mean an exit strategy is likely not in Twitter's near term future.
4y
Rodrigues Rodrigues
Ok thanks i didnt put a trigger to sell and it retraced so quickly...I love the stock but affraid of global markets right now...
4y
Rodrigues Rodrigues
Are you holding through results 28 julgo?
4y
Rodrigues Rodrigues
July
4y
Serge Berger Serge Berger
Not sure yet, I will take it one day at a time. The risk of holding through earnings is that they announce something that kills the hopes of a buyout or strategic alliance...
4y
Rodrigues Rodrigues
Just like me...on the other side there s a risk of a spike in shares after earnings and we re out;)
4y
Serge Berger Serge Berger
trading and active investing is an exercise in risk management. Personally I prefer to live to fight another day (be more risk averse) than gambling it on some spectacular outcome
4y
Rodrigues Rodrigues
I think bad news discounted already so there s potential to upside but not sure If i ll hold just a small amount through results. Also If you re in for long no use to sell. Thanks Serge keep us updated If you see any new buy/sell targets

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