Twitter (NYSE:TWTR) does not look healthy, and for investors, that presents concern. It has been moving aggressively, though, that is good for aggressive traders, and I too appreciate that, but for investors, every bounce has been met with selling pressure.
When Twitter's lock-up expiration came, I recommended that persons holding shorts in Twitter cover those positions. We has previously discussed shorting the stock after the impressive, but mis-guided fourth quarter run last year. We considered that to be a form of "window dressing" by hedge funds as they tried to capture last minute returns to catch up with the market in the final few weeks of the year.
We will never know if we were actually right or wrong about this rationale, but the stock did drop violently, and the more recent recommendation to cover shorts in Twitter brought with it an implication that Twitter may also become a buy again soon. The problem is, it has been a few weeks and Twitter is not giving us what we need to make it a compelling buy.
Instead, we are hearing more negative news than positive, and the recent bounces have, in many respects, all appeared to be "dead cat" bounces. That means that sellers have been there every time the stock has tried to bounce. The only saving grace is that the stock is still above its IPO price.
Remaining over the IPO price creates a floor for some investors psychologically, it could even earmark excellent trading opportunities from time to time, but for investors, Twitter does not look healthy at all.
In fact, according to our real-time trading report for TWTR, the stock is slowly deteriorating, resistance levels are falling on a midterm basis, and the associated risks with deteriorating technicals is that they are often associated with deteriorating fundamentals.
This may be a unique circumstance given the attention paid to Twitter and the ability the company has to reach hundreds of millions of potential smaller investors, who are often very weak-handed, but if a stock's price begins to deteriorate, there are usually underlying reasons.
For Twitter, the reason may be as simple as valuation. Twitter ran too much late last year, it was a great short, but there have not been any compelling buy signals yet. With the declining midterm resistance line in focus, unless Twitter breaks above midterm resistance as that is defined in our report, it will not offer much upside potential from current levels. This is a technically ominous observation.
The good news is that numerous analysts who seemed to be very cautious with Twitter at almost the same time we were talking about shorting it have now turned tables. Upgrades have come regularly recently, and that makes some investors happy, but it does not change the facts. Twitter is clearly not as expensive as it was, but it ran for reasons that had nothing to do with the company last year, and using those levels as a gauge for investing at current levels is a grave error.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation for the publicly traded companies listed herein for writing this article.