Stars Could Be Aligning for a Big Square Bounce

A pullback to a pair of trendlines could have bullish implications for SQ

Nov 1, 2018 at 11:02 AM
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Like most of the stock market, the shares of Square Inc (NYSE:SQ) struggled in October, giving up more than 25%. However, SQ stock recently sent up a pair of technical buy signals, and seasonality could bode well for the security. With earnings less than a week away, we decided to look at the prospects of a short-term Square rebound.

After touching a record high of $101.50 at the start of October, SQ retreated in step with Wall Street. However, the equity recently came within one standard deviation of its 160-day and 200-day moving averages, after a lengthy stint above these trendlines. Similar pullbacks in the past have been big-time buy signals for the payments processor.

In the past three years, there were two such pullbacks to the 160-day, and SQ was higher one month later both times, up an average of 5.73%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. The only other time SQ retreated to the 200-day in this manner preceded a one-month surge of 9.78% for the shares. From the stock's current perch at $74.27, a similar bounce would put it back above $80.

SQ stock chart nov 1

As alluded to earlier, seasonality is also in Square's favor. While SQ has only been traded since 2015 -- meaning the sample size is limited -- it's averaged a gain of 7.1% in the 44th week of the year (this week), according to Schaeffer's Quantitative Analyst Chris Prybal. In fact, the equity has averaged positive returns in Weeks 44-47, including a 7.5% gain during Week 46. So far this week, SQ is up 2.8%.

Meanwhile, the company is slated to report earnings on Wednesday, Nov. 7. It's worth noting that SQ moved higher the day after its last four earnings reports, and has gained after seven of the last eight earnings releases. After earnings in August, the security popped 8.7% in one session.

Another earnings beat could lure some bearish analysts to the bulls' camp. Currently, more than half of the brokerage firms covering SQ maintain a tepid "hold" or "strong sell" rating, leaving the door open for potential upgrades.

Traders wanting to speculate on Square with options will be interested to know that the stock's Schaeffer's Volatility Scorecard (SVS) sits at a lofty 94 out of a possible 100. This means SQ has handily exceeded options traders' volatility expectations in the past year.


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