Breakout

Why it might be time to sell your shares of Twitter

Philip Pearlman
Breakout

Back in early December, I was bullish on Twitter (TWTR) for three reasons when it was $50. It has since rallied more than 40%. But nothing lasts forever and in early trading today the stock was down 5% thanks to word that analysts slapped it with an underperform rating.

So why did it rocket so high so fast and why is it now coming back to Earth?

First, the fundamental story is still an exciting one and Twitter will have an opportunity to create all kinds of value few yet foresee. For instance, with a constantly improving ability to crunch its massive real time data set, Twitter may have an opportunity to monetize search, which would be huge. I can imagine Twitter placing relavent geolocated ads next to its users’ searches for auctioned keywords similar to Google’s approach to traditional search.

Related: Twitter Sets New Highs: Here Are 3 Reasons Why It’s Going Higher

While valuations are now stretched even further after the stock's move above 70, this fundamental optionality case still holds and the stock is still a speculative buy in this regard.

Second, hedge funds were going to pile into this low float noise, heavy play to chase performance into the end of the year. This one played out according to plan and that trade is now out of the market. Hedge funds have gorged themselves successfully on Twitter shares.

Related: Why Twitter Has Teen Appeal: Rachel Fox

Third, Twitter stock looked good technically, having held the 40 level and breaking above 50. This one also played out but now the stock is stretched and has even gone parabolic to some degree with an increasing slope to the price rise.

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As Dragonfly Capital’s Greg Harmon points out, yesterday’s price candle (December 26) looks like a spinning top and the 20 point measured move has been realized.

If you caught the big December move, now might might be a good time to lighten up or sell depending on your time frame and approach. Given the hedge fund chase is mostly out of the market here and, technically, price is much more stretched than at 50, you will want to see some flagging or sideways price action as the constructive scenario before another move higher.

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