Twitter stock has rallied nearly 8% in 3 days, but is now overbought and poised to face strong resistance, which could bring this rally to a halt.
The last week or so has been a good time for languishing social media companies Twitter Inc (NYSE:TWTR) and Snap Inc (NYSE:SNAP), with both stocks rallying hard after a rather rough phase. While Snap shares have now gained over 27% in the last seven to eight days, shares of Twitter have notched up impressive gains of close to 8% in the last 3 days alone. News updates about the possible rollout of a subscription service and a new promotion feature lifted Twitter shares earlier this month. However, these updates made the headlines towards the end of July, and there have been no new updates in the last few days. The company's shares seem to have gained lost ground largely on the back of a favorable technical set up, with some help from the improving sentiment around Snap, which it is often compared to. However, the technicals no longer support this rally. Twitter shares are overbought and are poised to face strong resistance from a key moving average. What's more, the set up is similar for Snap as well. Investors would do well to review their positions in Twitter stock right now.
Why Twitter Stock Has Rallied Lately.
As we highlighted earlier in the post, there hasn't been much fresh news pertaining to Twitter lately. The last relatively positive news that Twitter was testing a new subscription styled promotion feature came towards the end of July. And, while the company is believed to be testing this feature by offering it to a select set of users, there have been no further updates on this front. Twitter shares seem to have rallied largely on account of two factors in the last 3 days. For starters, Twitter shares had corrected sharply following its disappointing second quarter earnings. Twitter stock, which was trading at over $20 per share prior to the earnings announcement, had fallen by over 21%, to as low as $15.6 a share. This crash led to a favorable technical set up.
Over the last few days, we saw the emergence of multiple positive technical triggers for Twitter stock. First, Twitter's 100 day Simple Moving Average (SMA) made a bullish crossover, rising above its 200 day SMA. In technical analysis parlance, this is called a Golden Cross. A Golden Cross occurs when a shorter duration moving average cuts a longer duration moving average from below. This is considered a bullish signal by technical traders. Second, we saw Twitter's Moving Average Convergence Divergence (MACD) making a bullish crossover with the signal line 2 days ago. Again, this is a bullish indication. And lastly, we saw Twitter's stock price rising above its 20 day SMA, which was another bullish signal.
Apart from the technical triggers, the second factor which could have contributed to this rally is the improved sentiment around Snap shares. Snap has often come to be compared with Twitter, and both stocks had corrected significantly following their earnings announcements. Even though several analysts have argued that Snap stock is a worse investment than Twitter, the former continues to enjoy far steeper valuations. It's likely that the rise is Snap's stock price had a rub-off effect on the sentiment around Twitter. However, Twitter shares may not get much help from either of these factors in the coming days, as both Twitter and Snap look overbought and face strong resistance from key moving averages, suggesting that the rally could come to a halt.
The Rally In Twitter Stock May Be Losing Steam.
Twitter's technical chart shows that the stock is currently overbought, if you go by the Bollinger Bands, a commonly used momentum indicator. Twitter's stock price is now touching the upper Bollinger Band, which is considered to be a sign that the stock has entered overbought territory. Further, the stock is poised to face strong resistance at 3 different levels, from its 50 day SMA, 100 day SMA and 200 day SMA. At $17.12, Twitter's 200 day SMA is just 0.9% higher than yesterday's closing price, while its 100 day SMA is 1.7% higher at 17.24.
Even if Twitter shares manage to break out above these levels, the stock will face another strong resistance from its 50 day SMA at 17.59, which is about 3.7% above yesterday's close. Further, even if you look at Snap's chart, the narrative is similar. The stock is overbought according to the Bollinger Bands, and is facing strong resistance from its 50 day SMA. From the looks of it, the rally may be over for now, for both stocks. However, Snap has had multiple positive triggers, with a slew of good news driving the optimism. That's not the case for Twitter though.
Further, while some believe that the promotion feature, which is currently being tested, is good for Twitter, we're not entirely sure it is. Twitter is currently testing something that falls between its present advertising model, and a run off the mill subscription service. Quoting from one of our recent posts:
"The service, which costs $99 a month, is aimed at smaller businesses, brands and individuals, as opposed to big customers. The core offering is the ability to automatically promote tweets, to boost reach, engagement, and following on the platform for subscribers. This way, subscribers get a means to reach Twitter users who don't currently follow them. Further, the service also is less demanding in terms of the time, effort and expertise required to run social media campaigns."
While this seems like a great idea, it could have its pitfalls. Such a service could end up annoying its small, albeit a loyal set of users. It's one thing to see more professional advertisements or enhanced ad loads, and completely another, to be drowned in a flood of self-promotion. What's more, some of it may not necessarily be well crafted, interesting or of value to users. All in all, there's not enough reason to be gung-ho about Twitter right now, and the stock looks set to head lower in the near to medium term.
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