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Considering Current Levels, Wait for a Dip Before Buying Square Stock

Tyler Craig
·4 min read

No matter how you slice it, 2020 was a banner year for Square (NYSE:SQ). And for a company that’s had a handful of monster years in its history, that’s saying something. Today we’re digging into the numbers, chronicling the price action and sharing a Square stock options trade that has potential heading into 2021.

Square, Inc. (SQ) logo seen displayed on smart phone. Square, Inc. is a financial services, merchant services aggregator, and mobile payment company
Square, Inc. (SQ) logo seen displayed on smart phone. Square, Inc. is a financial services, merchant services aggregator, and mobile payment company

Source: IgorGolovniov / Shutterstock.com

Let’s start with the headline earnings per share over the past three quarters: a two-cent loss followed by profits of 18 cents and 34 cents. I’m cherry-picking the starting point because it marks the low point following the disastrous economic downturn in the first quarter.

There’s no denying the rapid rebound in earnings has been one of the driving narratives behind Square stock’s recovery. Stocks don’t usually rise 600% over eight months on fluff. It’s a boom born of earnings growth and rosy expectations about the future.

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Square Stock’s Price Action


Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

Square stock’s meteoric ascent is best seen on the weekly time frame. March’s massacre set the stage for an epic recovery. What impresses me most is the trend’s consistency. Normally, snapback rallies lose their steam as a more sustainable trend settles in. But not so with SQ stock. The trajectory of its oversold bounce continues to this day.

Every month along the way, even the optimists would have agreed the pace was unsustainable. Yet sustain it did. It’s a lesson in the futility of fighting trends. Square is my new poster child when teaching the bedrock charting principle that a trend in motion stays in motion. Now, is it a phenomenon destined to be killed by the calendar because we’re soon entering a new year?

I doubt it. Instead, I suggest something less arbitrary will serve as the wake-up call. When prices climb to unjustified levels, quarterly earnings usually offer the much-needed dose of reality. It doesn’t mean that Square stock will crash. But if February’s numbers aren’t as rosy as what traders are pricing in based on this year’s insane run, then the stock’s vertical trajectory will become less so.

Take a More Tempered Approach

As far as the weekly trend’s current posture, we are pushing beyond the upper channel line that has defined the stock this year. From a risk-reward perspective, that makes this a tough sell for new bull trades if you’re looking for a longer-term trade entry. A drop toward the low $200’s would be far more attractive. Rather than piling in now, then, I suggest a more tempered approach. Buy some now, if you must, but preserve some capital to put to work at lower prices when the highly probable pullback arrives.

Here’s the daily chart with the same channel lines drawn. Note, again, how we’ve busted through the top end, signaling short-term overbought conditions. I’m eyeing $216 as the first support level and potential buy zone for those gaming the short-term trend.

Square (SQ) stock chart with upside breakout
Square (SQ) stock chart with upside breakout


Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

Suggested SQ Stock Options Play

For those looking for longer-term exposure to SQ stock, I suggest purchasing call vertical spreads. You could always buy the shares, mind you, but the options route is cheaper and offers more bang for your buck. I prefer a spread over buying calls outright because it will mitigate your time decay risk.

As mentioned, I’m not in love with the entry point here. If prices can retreat toward the 20-day moving average, or better yet, the 50-day, then I’m a much bigger fan of the trade.

Depending on where the price lands before pulling the trigger, I suggest buying an at-the-money call while selling multiple strikes out-of-the-money. For instance, if you entered now, with the stock near $230, I would buy the $240 call while selling the $260 call or higher. You can control the cost by widening or narrowing the spread width.

Consider using March or June options to give Square plenty of time to continue its trend higher.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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