Momentum  darling Square, Inc. (SQ) got crushed in Monday's session, plummeting more than 16% after BTIG Research analyst Mark Palmer downgraded the payment application provider from "Neutral" to "Sell." His bearish commentary alleges that the stock's price has risen too far too fast, while the company has added unnecessary risk because Square Cash, its peer-to-peer payment service, now features bitcoin trading capabilities.

The stock traded more than 76 million shares – or nearly four times the average daily volume – during the all-day rout, signaling an intermediate climax that could end the long-term uptrend. However, it will take months to confirm a top, allowing positioned players to seek a more favorable exit or stand pat, looking to average down in expectations that the decline will mark a major buying opportunity.

Trend climaxes often unfold through heavy-volume reversal days, but context is everything in the financial markets. While Monday's turnaround signals the end of the rally wave that started on Nov. 9, it is important to note that the stock had posted gains on higher-than-average volume in 10 of the past 11 sessions, reaching extremely overbought levels that will now work out of the system. In turn, that suggests a pause lasting for several months rather than a ferocious decline. (See also: Square Stock at Risk on 'Bitcoin Mania': BTIG.)

SQ chart (2015 – 2017)

The company came public at $11.20 on Nov. 19, 2015, and eased into a trading range with resistance in the mid-teens. It posted an all-time low at $8.06 in February 2016 and bounced off that level in the second quarter, completing a broad double bottom reversal. It took eight months for the subsequent uptick to reach range resistance, finally yielding a February 2017 breakout gap between $15 and $16.70.

Volume and price rate of change escalated rapidly in May, with the momentum crowd jumping in and generating a beneficial feedback loop that nearly tripled the stock's price into Nov. 24, when it peaked at $49.56. A bearish hanging man candlestick printed in the prior session caught the eye of many technicians, presaging this week's rapid descent, which has trapped a large supply of weak-handed market players.

Three rally waves since August have ejected off the 20-day simple moving average (SMA), while Monday's decline reached that level at the closing bell. It is roughly aligned with round number support at $40, setting up a preliminary test of bullish resolve. A breakdown will likely target the two-month trendline of rising lows, currently near $37.50, which also marks the .786 Fibonacci rally retracement level and support generated by the breakout above early November range resistance. (For more, see: Square's Market Cap Is Now Bigger Than Twitter's.)

Bulls need to hold that line in the sand because a 100% retracement of the November rally down to $35 would set off a bearish first failure signal, an early warning for a longer-term top or correction. The 50-day exponential moving average (EMA) now aligned at that level often acts as a magnetic target following a high-volume reversal, so a test may be inevitable in the coming weeks. The stock has held moving average support since August 2016, so a breakdown would trigger major sell signals.

Fortunately for bulls, on-balance volume (OBV) warns short sellers and other bears to curb their enthusiasm for now because technical damage to this point has been minimal. The indicator entered a healthy accumulation phase in the second half of 2016, lifting into a series of new highs that escalated into a climactic November parabola matching lofty price action. This week's downturn is barely visible on the daily chart, highlighting intense institutional sponsorship that is unlikely to abandon ship unless deep support levels break in the coming months. (See also: Square Stock Jumps to Fresh Highs, Remains Overbought.)

The Bottom Line

Square shocked complacent shareholders this week, dumping more than seven points in a single session while posting the highest volume in its two-year public history. Heavy buying interest ahead of the reversal minimizes the technical impact of the decline, suggesting that bulls will eventually prevail and lift the stock to new highs. (For additional reading, check out: Square Is Becoming a Bank.)

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