Square, Inc. (SQ) stock is trading higher on Thursday even though the company missed 2020 earnings estimates by a wide margin. The e-commerce provider posted a loss of $0.02 per share during the quarter, lower than expectations for a profit of $0.13 per share, while in-line revenues at $1.38 billion marked a healthy 44% year-over-year increase. Shareholders chose to ignore the quarterly loss after the company advised that business had picked up substantially in April following a pandemic-driven decline in March.

This e-commerce business is highly cyclical, tied to merchant activity in Canada, the United States, the United Kingdom, and Australia. Digital transactions dropped dramatically in March as businesses all around the world closed their doors, but the reopening now in progress is improving depressed metrics. Even so, no one can accurately forecast the level of daily business activity in the third or fourth quarters due to the continued impact of the pandemic.

The stock generated momentum-fueled profits in 2017 and 2018, but buyers then walked away, yielding mixed range-bound action while quarterly results worked off an exceptionally high price-to-earnings (P/E) ratio that has now dropped to 97. The world economy will need to recover fully in the coming quarters to justify this high multiple, but that seems unlikely given continued fallout from the pandemic.

SQ Long-Term Chart (2015 – 2020)

Long-term chart showing the share price performance of Square, Inc. (SQ)
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The company came public in November 2015, opening at $11.20 and settling into a trading range between $8 and $16. A March 2017 breakout attracted intense buying interest, yielding a steady uptick that posted a graceful series of higher highs and higher lows into October 2018's all-time high at $101.15. The stock lost altitude in the next two months, dropping more than 50% into December's seven-month low at $49.82.

The bounce into March 2019 recouped about half those losses before reversing near $80, while a July breakout attempt failed, giving way to a steep decline into a nine-month low in the mid-$50s. Square stock rallied to range resistance for the third time in February and surged into the mid-$80s before a COVID-driven decline failed the breakout, reinforcing year-long resistance. The sell-off broke the 2018 low in March, hitting an 18-month low in the low $30s before bottoming out.

The turnaround printed the fourth point in a broad declining channel that has now contained price action for the past 19 months. Not surprisingly, channel resistance is setting up in the low $80s, right near the price level that has triggered three reversals in the past 14 months. The stock is now trading about nine points under this barrier, attempting to fill the March 9 gap, which it will accomplish at the same time it reaches the .786 Fibonacci sell-off retracement level.

The weekly stochastic oscillator entered a buy cycle from the oversold zone at the start of April, predicting at least six to ten weeks of relative strength. It has now crossed into the overbought zone and lifted into the same level that triggered reversals in December and February. The current buy cycle has now entered its sixth week, right at the lower edge of the predicted length, raising the odds for a reversal after the gap gets filled.

SQ Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of Square, Inc. (SQ)
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The on-balance volume (OBV) accumulation-distribution indicator hit a new high with price in October 2018 and continued to post highs throughout 2019, even though the stock had entered a correction. This highlights strong institutional sponsorship, greatly improving the long-term technical outlook. OBV has just broken out once again even though the stock is trading well below the February peak, adding to a bullish divergence that could eventually lift Square stock into the triple digits.

The Bottom Line

Square stock has rallied to a two-month high despite a mixed first quarter earnings report, highlighting continued bullishness that could eventually support a breakout.

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