Twitter, Inc. (TWTR) stock rallied to a three-year high in the low $40s on Monday but is quickly approaching resistance that's likely to trigger a multi-month reversal that traps trend followers who have booked impressive returns since the social media giant broke out in February. As a result, placing trailing stops or taking partial profits at this time looks like a conservative approach to risk management.

The February breakout mounted tough resistance at the 2014 low near $30, setting off a euphoric buying wave that has now reached within three points of the 2013 IPO opening print, which marks hidden resistance for stocks that fail to hold their gains after coming public. An uptrend could stall for months at this barrier, shaking out a large supply of weak hands before turning higher and testing historic highs. (See also: Is Twitter Stock Topping Out?)

TWTR Weekly Chart (2013 – 2018)

 

The stock rallied above $50 on the first trading day in November 2013, ahead of a buying surge that reached an all-time high at $74.73 in December. The subsequent decline gathered momentum into the second quarter of 2014, cutting through the opening print before bouncing in the upper $20s. It mounted that barrier during a summer rally but came up short, posting a lower high in the mid-$50s. An April 2015 breakout attempt then failed, setting the stage for a July breakdown to new lows.

Selling pressure eased in August, yielding a bounce that tested new resistance near $30. Short sellers reloaded positions at that level, generating a climactic selling wave into the mid-teens in February 2016. It tested that level in May, posting an all-time low at $13.73, while a summer recovery wave stalled near the August 2015 low. A final test at base support in April 2017 completed the bottoming pattern, ahead of an uptick that gathered strength into the February 2018 breakout.

That rally mounted broken support at the 2014 low and tested that level for three months, ahead of a secondary impulse that has now reached the low $40s. The uptick will run into major resistance when it hits $45, marked by the IPO opening print, 50% retracement of the long-term price history and 78.6% retracement of the selling wave that began in April 2015. In addition, the stock is now engaged in the fifth and final wave of an Elliott five-wave rally set that began at the 2016 low.

TWTR Daily Chart (2017 – 2018)

 

Price action has been solid as a rock since the April 2017 low, and there are no gaps to fill. The rounded low between February and June 2018 marked a classic continuation pattern, confirmed by the June 5 breakout. Given this outstanding performance, bulls could easily ignore warning signs when they come and get stuck in a reversal. Skepticism is perfectly normal, but the wise trader will still carry an umbrella on a clear day if the forecast calls for rain.

On-balance volume (OBV) tested the 2014 low in 2016 and turned higher, entering an accumulation wave that took many months to translate into higher prices. It broke out to a new high in July 2017 and escalated into 2018, maintaining a bullish divergence because price is still trading more than 30 points under the 2013 peak. At a minimum, this impressive sponsorship predicts strong dip buying interest if and when the reversal kicks into gear. (For more, see: Will Twitter Head Higher as Part of S&P 500?)

The Bottom Line 

Twitter broke out of a multi-year basing pattern in February 2018 and entered a strong uptrend that is now approaching major resistance in the mid-$40s. Although technicals are firing on all cylinders, it makes sense to take profit protection measures as the barrier comes into view. (For additional reading, check out: 5 Internet Stocks With Huge Upside.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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