Twitter Stock in Freefall After Weak Quarter

Twitter, Inc. (TWTR) stock has sold off more than 18% and dropped to a seven-month low in Thursday's pre-market session after the company missed third quarter profit and revenue estimates while lowering fourth quarter guidance. The company blamed "product issues" and greater-than-expected seasonality for the shortfall, which has broken 200-day exponential moving average (EMA) support for the first time since January.

The across-the-board shocker dumped the social media giant's shares more than 20% prior to a weak bounce, with departing shareholders worried that well-published growth initiatives had run their course. They could be right, with just a minor uptick in "average monetizable daily active usage" during the third quarter. That limp performance is reflected in updated fourth quarter guidance, which estimates operating income between $130 million and $ 170 million vs. prior expectations of $207 million.

The bearish news may renew calls for Twitter to find an attractive suitor, similar to 2016 when a flurry of buyout rumors lifted the stock off multi-year lows. Those whispers failed to play out with an actual deal, and a potential suitor may think twice because the company is now more richly valued due to a 2019 uptrend that posted a hefty return in excess of 25% prior to this morning's freefall.

TWTR Long-Term Chart (2013 – 2019)

The company came public in the mid-$40s in November 2013 and entered an immediate uptrend that posted an all-time high at $74.73 just one month later. The subsequent decline cut through the IPO opening print in April 2014, signaling a downtrend that continued into the May low at $32.00. That level provided support for the next 14 months, ahead of a proportional bounce that failed two attempts to mount the mid-$50s. 

A July 2015 breakdown gathered force through the second half of the year, dumping the stock into the lower teens in the first quarter of 2016. It tested the low twice and turned higher in June, underpinned by buyout rumors that ended in failure in the mid-$20s, triggering a four-point sell gap that trapped newly-minted bulls. The subsequent downdraft reached 2016 support for the third time in March 2017, yielding a successful test that completed a triple bottom reversal.

A February 2018 breakout above the 2016 peak attracted broad buying interest, lifting the stock less than three points above resistance at the IPO opening print in June  It sold off from that level a month later, drawing a topping pattern that found support in the mid-$20s at year end. Price action in 2019 failed to reach that peak, setting the stage for Thursday's dramatic breakdown to the lowest low since March.

The 2018 rally stalled at the 50% retracement of the 2013 into 2016 downtrend, while price action since October 2017 has drawn a rising trendline, with support now situated at $34.50. The stock will break that line at the opening bell without big upside in the next hour, raising odds the three-year uptrend has come to an end. Meanwhile, the monthly stochastics oscillator hit the overbought level in September and has now crossed into a sell cycle that predicts at least six to nine months of relative weakness. 

The Bearish Outlook

Taken together with the bearish price structure, selling energy could develop quickly, dumping Twitter stock into a test at the December 3018 low at $26.26. A breakdown through that level would mark the final nail in the rally coffin because it would also complete a double top breakdown that exposes a trip back to the 2016 low. As a result, remaining bulls need to hold that support level at all costs or risk a rapid escalation of the developing downtrend.

The Bottom Line

Twitter has sold off nearly 20% after missing third quarter estimates and lowering fourth quarter guidance, raising fears that its user base will no longer support rapid growth.

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