Is It Time To Book Profits In Twitter Inc (TWTR) Stock?

Twitter Inc (NYSE:TWTR) stock is approaching $20 levels. Should you take some profits off the table now?

Shares of San Francisco, California-based Twitter Inc (NYSE:TWTR) have had a great run lately. After a bad start to the year, the micro blogging platform has given investors something to cheer about, with its shares gaining by close to 18% in the last one month alone. That takes the stock's return over three months to a staggering 37% plus, which brings us to the important question - is it time to book profits yet? We think the answer is 'yes'. Here's why investors would do well to book profits, at least partially.

For starters, TWTR stock has simply run up too much. While there have been a few positives emerging for the social media company in recent times, valuations aren't necessarily cheap enough to justify such a big rally. Twitter's bull run began when the company reported better than expected user addition during Q1. This has triggered a lot of optimism around the stock, with some analysts calling this the turning point for Twitter. Meanwhile, Twitter has signed a slew of live video streaming deals, which have raised expectations.

This was further aided by bullish commentary from the likes of Cleveland Research, a boutique equity research firm. Cleveland Research said, "it sees indications that Twitter's advertisers and partners are encouraged by user growth on the site, along with changes in ad delivery and progress in Live content." The firm went so far as to say that "This is the best relative feedback in our TWTR research in 2+ years, suggesting some potential bottoming in fundamentals; we look for follow-through improvement in our research for turning more near-term positive,"

As is always the case with Twitter, we've seen our fair share of buyout speculation as well. However, it remains to be seen whether these triggers can sustain this uptrend. While user growth improved in Q1, we're yet to see the numbers for Q2. If the momentum in user addition doesn't continue, we're likely to see a big correction. Even if user growth is healthy, though, it doesn't guarantee traction on the advertising front. Advertisers have more choice, with platforms like Instagram adding users at a blistering pace, and Inc (NASDAQ:AMZN) starting to grow its advertising business meaningfully. Further, about a year ago, there was a similar sort of excitement around Twitter's live streaming initiatives. However, as we've seen in the past, great initiatives don't necessarily mean more users or better top line growth. At this point of time, it appears as if there are too many favorable assumptions getting factored into the TWTR stock price.

TWTR Stock Has Entered Overbought Territory.

Twitter's technical charts also suggest that the stock has entered overbought territory. Two popular indicators used to gauge momentum are the Relative Strength Index (RSI) and the Bollinger Bands. And as things stand, both of them signal an overbought condition in tandem, which is considered a strong signal. The RSI has a current reading of 71.9, above the commonly used overbought threshold of 70. Twitter's stock price is also touching the upper Bollinger Band, which confirms the fact that the stock has entered overbought territory. Given the massive rally in the stock lately, a sizeable correction shouldn't come as a surprise.

Another good indicator of market sentiment is short interest data. The latest set of short interest numbers became available last week, and going by those numbers, short interest in Twitter stock has climbed gradually over the last month. After falling to 52.6 million shares as of May end, short interest in Twitter has risen to 57.15 million shares as of June end. As a percentage of float, short interest has risen from 7.9% to 8.6%. While these trends indicate a gradual build up of negative sentiment, 'days to cover' now stands at 3.62. A reasonable uptick from here could trigger short covering which could potentially drive the stock higher in the near term. Further, today's trading session will be important, given that the stock is on the verge of Golden Cross. Twitter's 20 day Simple Moving Average (SMA) is set to make a bullish crossover and rise above the 50 day SMA. If this plays out today, you might just see some optimism from technical traders over the next couple of days.

With Twitter set to report its Q2 numbers later this month, we think it's prudent to book some profits. Investors who want to time this exit would do well to keep an eye on the stock this week. Others could reduce exposure right away, given the massive rally we've seen in the stock. Looking for more technical trading ideas? Check out our daily trading ideas section. If you're looking for fundamentally solid companies though, you should also take a look at our top stock picks from the tech sector, which have beaten the NASDAQ by over 147%.

Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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