Late last year, one of the most anticipated initial public offerings was Twitter (NYSE: TWTR), a company that provides “a global platform for public self-expression and conversation in real time,” according to their corporate profile. Others have viewed it as a social media outlet for the permanently narcissistic and the petulantly self-important, a condition that would be intolerable were it not for the merciful 140-character limitation that the company imposes for its “tweets.”
Nevertheless, the IPO was met with generally positive fanfare, and after a brief period of uncertainty, the stock proceeded to go parabolic mere days before closing out a memorable 2013. Of course, the unfortunate timing of the rapid bullishness all but guaranteed that the following year would not be so kind to the company nor its equity valuation. After a rebound initiated in the middle of this summer began to cool off, the shares are once again in undersold territory, according to popular technical analysis indicators. Should investors risk getting involved in the social media tango or has the air been finally let out of this fickle industry?
At time of writing (December 6, 2014), the current price of Twitter shares is 14.3-percent below its initial offering, a sizable decline and a circumstance that should not be viewed as a buying opportunity before taking a critical look at the facts.
Since peaking at around $55 in early October, share valuations gapped down severely, pushing its 50 day moving average down closer towards the newly formed 200 day moving average (due to the newness of Twitter stock, the lagging 200 DMA was not mathematically possible to compute until late August of this year). That current sentiment cannot push the price higher in an underlying environment where most all stocks are rising is not the greatest sign of confidence.
Nor is the fact that since its inception, the linear trend line for Twitter stock carries a decidedly negative trajectory. Were it not for the “V-shaped” bottom that occurred during the month of May, the overall price action would chart a series of lower highs and lower lows, the classic technical definition of a bear market cycle. Until the price stabilizes and forms a base upon which another attempt at new highs can develop, investors may want to take an extremely cautious approach.
The temptation to buy the “blood on the streets” should be tempered with some mathematical logic as well. While the Relative Strength Indicator, a common technical analysis tool used to gauge market sentiment, does confirm that Twitter shares are oversold, such a reading of the indicator can be unreliable under extreme price swings. And the month of October was particularly volatile, with shares peaking at $55.42 and dropping to a low of $41.47, a top-to-bottom range of nearly 34-percent over the course of just 23 trading days! Furthermore, since late October, the bulls failed to initiate some pretense of a dead-cat bounce, with shares steadily falling to where it is at today.
Like the character limitations in Twitter, the opportunity to profit from its company shares appears to have been truncated. The parabolic move that occurred shortly after the IPO does not seem capable of repeating itself and most objective indications point towards a decline in sentiment.