(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Despite falling by nearly 16% from its highs in 2018, shares of Square, Inc. (SQ) are still up by 40% on the year. The significant returns in the stock come despite a tremendous amount of stock market volatility and an S&P 500 that is relatively flat on the year. But analysis of Square's technical chart suggests the recent declines in the stock are not finished and may lead to shares of the mobile payment processor falling another 14% further from its current price around $48.50 to $42, over the near term. 

An Investopedia article on March 27 noted that Squares stock had broken a critical technical uptrend and that the stock was set up to decline by 15% from its price of $53.35 to $45.20. Shares of the stock hit support at $45.20 at the beginning of April, and have since rebounded to approximately $48.50, but it appears that rally may only be a bounce and more declines are the on way. (For more, see also: Square's Soaring Stock Is Due for a Correction.)

SQ Chart

SQ data by YCharts

A Drop to $42

Squares daily chart shows a trading channel the stock has been in since November of 2017, and the lower-end of the range is likely where the stock is headed, around $42. As the chart shows the stock has retraced to that lower trend line on many occasions, and it is likely to be the direction the stock gravitates towards. 

 

 

Not Oversold

The relative strength index (RSI) has been trending lower since peaking in late November when it rose to well over 80, a level over 70 is considered overbought. But the stock's RSI has been trending lower since that time despite the stock reaching record highs in the middle of March. The divergence between the price and the RSI is a bearish sign and would also suggest that shares of Squares may fall further. For shares of Square to reach an oversold condition, the RSI would need to drop to 30 or lower, it is currently around 50.

Buyers Thinning Out

Volume in Square has been steadily declining since the middle of March. Around the same time the stock price peaked, at nearly $60, it could be a sign that buying interest in the stock has been dissipating, and with a lack of buyers, there is nothing to push shares higher.

Intraday Chart

The intraday 5-minute chart also shows some issues. The first is a gap that exists between $47.90 and $48.50, which likely gets filled. The second is a strong layer of technical resistances that rest between $48.90 and $49.70. The stock has tried on multiple occasions to rise above that region of resistance and has been unsuccessful.

 

Based on numerous bearish technical indications in the charts, it would seem that Square is likely to fall further in the coming weeks. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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