Is Twitter Stock Topping Out?

Twitter, Inc. (TWTR) shares ended a powerful two-month rally with a thud on Tuesday, dropping more than 10% in sympathy with Facebook, Inc's (FB) data breach controversy. The decline reached the opening print of the Feb. 8 breakaway gap, where it is set to bounce strongly on Wednesday morning. The session traded more than 82 million shares, the highest-volume selling day since July 2017.

The stock has posted the strongest gains in five years since August, breaking out of a multi-year basing pattern and more than doubling in price to a two-year high in the mid-$30s. Twitter is technically overbought and overdue for a pullback, so Facebook's trouble has provided a convenient excuse for profit taking and an intermediate correction. However, it's too early to tell if scrutiny directed at its larger rival will eventually engulf Twitter in its own political controversies. (See also: Facebook Data Breach: Twitter and Snap Stock Tumble on News.)

TWTR Weekly Chart (2013 – 2018)

The company's 2013 initial public offering attracted broad media attention, opening in the mid-$40s and heading into a strong uptrend that posted an all-time high at $74.73 in December. It turned tail into the second quarter of 2014, cutting through the IPO opening print before finding support in the low $30s. Two lower highs into April 2015 exhausted limited buying power, yielding a gravity-fueled decline that broke through 2014 support in August before landing in the low $20s.

A test at new resistance failed in October, generating a destructive selling wave that reached $13.91 in February 2016. It undercut the prior low by 18 cents between April and June, ahead of a strong recovery wave fueled by takeover speculation. Aggressive sellers returned after a deal failed to materialize, dumping the stock into a higher April 2017 low that completed the last stage of a double bottom reversal.

A stairstep rally broke out above the October 2016 high in February 2018 and reversed this week within two points of the .618 Fibonacci sell-off retracement level. The weekly stochastics oscillator posted its first overbought reading since September 2017 last month and crossed into a weekly sell cycle in reaction to this week's high-volume decline. This bearish turnaround predicts continued downside that tests the base breakout in the mid to upper $20s.

(If you're interested in learning more about Fibonacci retracements, check out Chapter 6 of the Technical Analysis course on the Investopedia Academy)

TWTR Daily Chart (2017 – 2018)

The .382 Fibonacci rally retracement level has narrowly aligned with the .382 sell-off retracement, highlighting hidden support at the dead center of the February breakaway gap, but a decline is likely to fill the gap completely before attracting major buying interest. In turn, dip buyers will be looking for a low-risk entry between $27.00 and $28.75. Tuesday's price action settled on strong support at the 50-day exponential moving average (EMA), suggesting that the dip crowd will need to wait a while before long-term buying signals hit the tape.

The stock got stuck for more than a month within the boundaries of the breakout bar before clearing resistance on March 14. The reversal triggered an immediate bull trap, dropping the stock into the bottom of the prior range while marking a technical violation that could presage a relatively severe test at breakout support. Interested market players will be watching the gap bottom in this scenario because a breakdown toward $25 could end the uptrend. 

On-balance volume (OBV) has acted better than price action for many years, lifting to a new high in 2015 at the same time the stock was trading nearly 20 points below the 2013 high. The indicator broke out to an all-time high in July 2017, although the stock didn't clear base resistance until 2018. These buying surges mark bullish divergences, signaling massive bottom fishing by value players and the merger and acquisition crowd. (For more, see: Facebook's Growth Threatened By Twitter, Snap.)

The Bottom Line

Twitter stock reversed sharply after posting a two-year high and could fill the February breakaway gap in the coming weeks, offering a low-risk buying opportunity in the mid to upper $20s. (For additional reading, check out: Twitter's Soaring Stock May Go 25% Higher.)

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

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