Momentum In Twitter Baffles Wall Street
For those unfortunate traders attempting to short Twitter (NYSE: TWTR), Thursday's price action had the potential to put in place a fairly reliable key reversal pattern. In other words, a scenario when a stock within the course of a day completely changes its pattern. However, with the issue now trading up over three points at 73.08, after making a new all time high at 74.73, bears may want to stay in hibernation.
At this time, TWTR has met one of the two criteria by opening at a level above the previous high and continuing to rise. However, for the issue to meet the second criteria, it must fall below its previous day's low (65.56). With the current low being 69.13, and already a huge range, it is highly unlikely that TWTR will meet the crucial second criteria.
Even if TWTR does not put the key reversal in place, there will certainly be more volatility ahead for the new issue. Since opening at 45.10 on November 7, reaching 50.00 on its first day, then bottoming at 38.80 on November 25, TWTR has almost doubled in the last 21 trading sessions. Although this is a highly unsustainable technical pattern, there have been many instances with previous high fliers that continued for longer periods of time.
Keep in mind, the old Wall Street adage, “the market or stocks can remain irrational longer than you can remain solvent.” In other words, investors shorting TWTR now may be right over the course of time, but will likely cover the position at a loss before the scenario comes to fruition.
Therefore, if one is looking to short TWTR or take profits, there will need to be a change in the fundamentals. With no formal announcement of its first earnings release (many sources anticipating late January) and other analysts not yet on the bandwagon, TWTR may continue to rally until its important earnings release.
Perhaps then the early bulls in TWTR sitting on large profits may take some chips off the table ahead of the announcement. Or aggressive shorts, anticipating that no matter what it delivers to the Street, it will not be good enough to support its parabolic move thus far.
For the technical trader waiting for other criteria to base a short a position on, they may want to be patient and wait for a double or triple top to develop -- followed by a few days of consolidation. The double or triple top may provide a level for a protective stop if the breakout of the consolidation period turns into a fake-out and TWTR resumes the move higher. Also, technical traders may want to wait for similar pattern to develop on the downside and attempt to short the issue when it violates major support.
With neither of these scenarios in place, and many shorts under water scrambling to cover on any declines, short sellers may be better off on sidelines until closer to its inaugural earnings release.
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