Shares of Twitter, Inc. (TWTR) have traded well since Oct. 26, when the company comforted long-suffering shareholders with stronger-than-expected third quarter revenue growth and a surprisingly upbeat fourth quarter outlook. The social media giant rallied more than 18% after the news and then added to gains, signaling a bullish change in character that could finally suggest a long-lasting bottom.

Even so, quarterly revenues fell 4.2% year over year, highlighting declining user engagement despite a series of well publicized initiatives to increase ad spending, improve margins and engage skeptical users. The results also triggered a barrage of analyst upgrades, but their commentary remained generally cautious, looking for incremental upside rather than a return to glory.

Fortunately for bulls, the technical outlook looks much stronger than spreadsheets might dictate, with the stock turning higher following a two-year basing pattern in the mid-teens. Several major obstacles remain, including the unfilled October 2016 gap between $20.50 and $24, but buying intensity has now increased to its highest level in the stock's four-year public history. In turn, this tailwind sets the stage for a trend advance that could reach the low $30s in 2018. (See also: Twitter Beats on Q3 Earnings, Stock Rallies 12%.)

TWTR Monthly Chart (2014 – 2017)

 

The stock came public in the mid-$40s in November 2013 and entered a strong uptrend that fed off Facebook, Inc's (FB) resounding success as a publicly traded company. However, Twitter's rally topped out at $74.73 seven weeks later and cut through the IPO opening print in March 2014, entering a downtrend that initially held support at $32.00. The subsequent bounce into the mid-$50s got sold aggressively in April 2015, generating a decline that broke range support three months later.

The sell-off finally came to an end in the mid-teens in the first quarter of 2016, yielding a May test at support, followed by a strong recovery wave into the mid-$20s. That rumor-fueled uptick failed to pan out with an expected sale, triggering a capitulative decline that trapped many market players. The stock has traded between those range extremes for the past 13 months, while shareholders have missed out on the most prolific technology gains since the dotcom era.

The monthly stochastics oscillator has carved a bullish pattern since September 2016, with a sell cycle into May 2017 followed by a buy cycle that has held high in the indicator panel since reaching the overbought line. This marks the first time since the public offering that the stock has shown long-term resilience, adding weight to a prediction that it has finally bottomed and entered an uptrend that could last one to two years at a minimum. (For more, see: Twitter Stock Rises With Its Character Limit.)

TWTR Daily Chart (2015 – 2017)

 

The 2015 decline broke 2014 support at $30, while the October 2016 gap carved strong resistance between $20 and $25. There is no easy path through these barriers, so it is wise to expect several months of testing and setbacks. A rapid advance to $30 makes sense once the gap gets filled, with that level marking the final obstacle ahead of a test at the IPO opening print. Given this two-steps-forward, one-step-back dynamic, profits may require a long-term holding period and a strong stomach.  

On-balance volume (OBV) predicts eventual victory for bulls, ending a long distribution phase in May 2016 and turning sharply higher despite the October gap and steep decline into April 2017. The indicator has continued to gain ground into the fourth quarter and is now situated at an all-time high, generating a strongly bullish divergence that predicts price will play catch-up. (To learn more, see: Uncover Market Sentiment With On-Balance Volume.)

The Bottom Line

Twitter stock rallied to a 52-week high after third quarter earnings and is now holding near $20, consolidating recent gains while establishing a platform for an assault on the October 2016 gap between $20.50 and $24. Significant buying interest will be needed to overcome supply through that price zone, telling interested market players to utilize long-term holding periods and relatively loose stop-losses to avoid inevitable downdrafts. (For additional reading, check out: Twitter Surges on Q3 Results: Log in to These ETFs.)

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

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