Square, Inc. (SQ) stock is trading around 2% higher in Thursday's pre-market after the payment processor beat third quarter profit estimates by $0.05 per share and met revenue expectations with a 39.7% increase in year-over-year receipts. Lower fourth quarter guidance kept a lid on positive sentiment, generating mixed action with sharp movement in both directions before the payment solutions provider settled above the flatline.

The San Francisco-based company trades at twice the value of rival PayPal Holdings, Inc. (PYPL), with a hefty 67 forward price-to-earnings (P/E) ratio. Market players have taken note of this high valuation, dropping the stock to levels first traded nearly 18 months ago. The bearish tape reached within five points of the deep December 2018 low in September 2019, highlighting vulnerability that has continued into the fourth quarter.

Wall Street analysts have been generally bullish on Square stock in recent months, with upgrades at Susquehanna, UBS, and Wells Fargo. However, some commentary has expressed concern over the high valuation and deteriorating investor sentiment. Additional calls in coming sessions could set a positive tone for price action into year end, underpinned by growing optimism about the 2020 economic outlook.

SQ Long-Term Chart (2015 – 2019)

Long-term chart showing the share price performance of Square, Inc. (SQ)

The company came public at $11.20 in November 2015 and settled into a trading range between $8.00 and the mid-teens. A February 2017 breakout caught fire, generating a powerful trend advance that held within a steep rising channel pattern into October 2018's all-time high at $101.15. The stock got cut in half in the next three months, descending in a straight line to a seven-month low in the upper $40s. 

A bounce into February 2019 stalled at the .618 Fibonacci sell-off retracement level in the lower-$80s, triggering a pullback into June, followed by a recovery wave that yielded a July breakout. The rally failed after second quarter earnings in August, triggering a big sell gap and decline that found support just above the December low in September. The stock has made little headway in the past seven weeks, reversing in the mid-$60s and dropping back into the upper $50s.

The monthly stochastics oscillator crossed into a buy cycle in January 2019, but the bullish signal failed in May before reaching the overbought zone. The indicator tagged the oversold zone for the first time since 2016 in October, but it still hasn't crossed to the upside. That event would set off a buying signal, but the prior failure lowers reliability that the stock is nearing or has hit a sustained bottom. 

SQ Short-Term Chart (2018 – 2019)

Short-term chart showing the share price performance of Square, Inc. (SQ)

A Fibonacci grid stretched across the 2016 into 2018 uptrend organizes recent price action, highlighting support at the 50% retracement in the mid-$50s that has been tested three times in the past 12 months. Meanwhile, the trading range has carved the outline of a potential symmetrical triangle with support near the 50% retracement and resistance in the mid-$70s. The 50- and 200-day exponential moving averages (EMAs) cut right through this formation, confirming a neutral pattern that could last another six to twelve months.

The on-balance volume (OBV) accumulation-distribution indicator posted a new high in October 2018 and rolled into a distribution phase that held high in the range, despite the major decline. It tested that peak in March and July 2019 but failed to break out, adding to neutral technicals that make perfect sense after a 1,200% uptrend. Classic market wisdom that "the bigger the move, the broader the base" comes to mind, predicting that this issue won't reward shareholders in 2019.

The Bottom Line

Square stock is trading higher after third quarter earnings but remains stuck in a trading range that is likely to constrain price movement well into 2020.

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