Twitter (NYSE 🙂 shares were sold last week, following a Congressional hearing on Thursday, in which lawmakers barred the CEOs of major social media platforms about the availability of misinformation on Twitter, Facebook (NASDAQ: ) and Google (NASDAQ :). However, the dip was only temporary.
Social media share has already recovered, despite Founder and CEO Jack Dorsey being summoned to troll the legislative body at the hearing. This was not the first time that Twitter has come under fire. The platform came under heavy scrutiny during the heavily controversial US presidential election, and gained extra attention as the drama surrounding the site's banning of then President Donald Trump unfolded.
Still, the company still has positive fourth-quarter earnings results and is showing resilience, even amid the site's perhaps temporary exodus of Trump supporters protesting the ban. Also, the stock's recent grind was in line with the broader sell-off in the technology sector.
More reasons for investor optimism about the San Francisco-based company: Twitter has significantly improved its platform architecture to increase its ability to be a source of better potential revenue for advertisers by targeting users more efficiently, something that it doesn't seem to have been priced in by the markets after the platform was redesigned.
As if fundamentals weren't reason enough to be bullish on stocks, we also see an opportunity from a technical perspective. The chart indicates that the 27% correction from its all-time high of $ 80.65 posted on Feb. 24 is over, signaling a buy dip at this stage.
The stock has been trading within a declining wedge formation since closing a gap of 10%, closing more than 13% higher following the fourth quarter earnings release in early February.
The sell-off that followed the late February record was part of the larger sell-off of the larger technology sector. The fact that the demand line did not match the steepness of the sales line suggests a disagreement about the market and thus an opportunity.
A falling wedge usually occurs after a climax rally, as described above. Note that the rally broke away from the stock's upward channel after earnings. Also note that the channel is currently supporting the wedge, suggesting it is the new floor.
Wedges invariably break against their prevailing direction, in this case upwards, but it is important to wait for the actual breakout. While there is a 2% chance of failure on falling wedges, traders will be knocked out if they don't have enough margin for wide stop losses if the pattern is not yet completed. As a rule, this is one of the most profitable patterns.
But remember, caution is advised. Part of the wedge was a bullish flag, which could turn bearish after the prior dip of nearly 24%, targeting a repeated downward move in the dollar amount, which happens to hit the bottom of the bullish wedge. However, as the long-term trend is rising, as indicated by the other fundamental and technical factors already described, an upward breakout could trigger a flag failure, which is much more common than wedge failures.
Trading Strategies – Long Position Setup
Conservative traders should wait for the upbreak, with penetration above March 16, $ 71.80 high, then waiting for a buying dip.
Moderate traders would wait for a close of more than $ 65.
Aggressive traders could enter at will as they understand the increased risk associated with the increased reward associated with being one step ahead of the rest of the market. Hence, a trading plan is crucial to establish the viability of a prudent trade.
Here's an example:
Trade Sample
Entry: $ 60
Stop Loss: $ 59
Risk: $ 1
Target: $ 80
Reward: $ 20
Risk: Reward Ratio: 1:20
Author's Note: This is an example only. There are many different approaches to the same subject, based on your timing, budget, and temperament. For example, you could enter $ 62, in case the price doesn't drop to $ 60, causing you to miss the trade, for the price of paying $ 2 for the earlier, more sure entry. A trader can get out for $ 70 to get more sure but lower profits. Until you find what you're comfortable with and works best for you, make small trades, to learn and gain experience, not to make a profit. Otherwise you will not gain experience or profit. Have fun trading!
