Twitter Stock Tests Semiannual Risky Level After Earnings Miss

Twitter, Inc. (TWTR) missed earnings per share (EPS) estimates on July 23 as the stock stalled after testing its semiannual risky level at $40.23. The stock is well above its weekly and monthly value levels at $33.04 and $32.32.

Twitter stock closed Monday, August 3, at $36.39, up 13.5% year to date and in bull market territory at 82% above its March 18 low of $20.00. Twitter is also in bear market territory at 20.6% below its Sept. 9, 2019, high of $45.85.

Twitter has a history of experiencing earnings volatility. Back on Oct. 24, 2019, the stock gapped significantly lower after the social media giant missed quarterly estimates. Then, on Feb. 6, 2020, the stock popped higher on an earnings beat.

An earnings beat on April 30 resulted in a stock price slide into May 14. The 50-day simple moving average (SMA) held at the low, setting the stage for a rally. After Twitter missed on earnings in its most recent report on July 23, the stock popped and then dropped following a failed test of its semiannual risky level at $40.23.

The daily chart for Twitter

The daily chart for Twitter shows the formation of a golden cross on July 14, when the 50-day SMA rose above the 200-day SMA to indicate that higher prices would follow. From left to right, note the earnings price gaps lower and higher. The first is a price gap lower on Oct. 24, 2019. The second is the price gap higher on Feb. 6, 2020.

The stock broke below its 200-day SMA on March 2 and then below its 50-day SMA on March 10. This led to the March 18 low of $20.00. The V-shaped bottom from the low tracked the stock to its 50-day SMA on April 2. The 200-day SMA was recaptured on May 26.

The 200-day SMA was a declining magnet until the golden cross was confirmed on July 14. This buy signal resulted in the rally that brought Twitter stock toward its semiannual risky level at $40.23, which was tested on July 23.

The weekly chart for Twitter

The weekly chart for Twitter is neutral, with the stock above its five-week modified moving average of $34.64. The stock is also above 200-week SMA, or reversion to the mean, at $28.59. The 12 x 3 x 3 weekly slow stochastic reading is projected to slip to 73.98 this week, down from 74.94 on July 31.

Trading strategy: Buy Twitter stock on weakness to its weekly and monthly value levels at $33.04 and $32.32. Reduce holdings on strength to its semiannual risky level at $40.23.

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each level uses the last nine closes in these time horizons.

The third quarter 2020 level was established based upon the June 30 close, and the monthly level for August was established based upon the July 31 close. New weekly levels are calculated after the end of each week, while new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, and annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by a gain of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.