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How to Trade Twitter Stock After the Earnings Debacle

Nicolas Chahine

I am a huge fan of the Twitter (NYSE:TWTR) platform. I use it for all my news feeds and I tweet daily. When I first heard about it in its infancy stage I had to watch a video to understand what it was all about. President Donald Trump catapulted its popularity to new levels and now almost serves as the White House printing press.

How to Trade Twitter Stock After the Earnings Debacle

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Although I like the platform, I am not of its business plan. I think that it should charge advertisers on a pay-per-click model like Alphabet (NASDAQ:GOOGL). There is no reason why advertisers who profit from every tweet and TWTR to get nothing from it.

When I click on a link from a media company tweet, I am often forced to watch a video ad that makes money for the account holder but not TWTR.

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That aside, I think it has made tremendous improvements and now Twitter stock has a decent valuation. TWTR stock now sells at a 15 price-earnings (P/E) ratio, which is reasonable. This is 25% cheaper than Facebook (NASDAQ:FB) and nine times cheaper than Netflix (NASDAQ:NFLX).

From an investment perspective, I don’t feel compelled to own it for the long-term like I would with Apple (NASDAQ:AAPL). They both sell for similar valuations, so, in that case, I’d rather risk my money on AAPL.

But it is a good trading vehicle in the short and midterm. Twitter stock acts well according to most of its technical pattern opportunities. I knew not to chase it above $42 per share. And I also knew to go long it on many big dips.  Extreme moves in either direction are always wrong. Somewhere in the middle always lies the truth.

TWTR stock had a sharp 30% rally off the December lows. It has given back a lot on yesterday’s disaster reaction to its earnings report. But it is still is up 7% year-to-date. It wasn’t so much that it missed the mark … It had better sales and profits than anticipated and that’s the literal bottom line.

But Twitter had weak areas of concern. It lost 9 million Monthly Active Users (MAUs) year-over-year. And, more importantly, management guided lower for the next quarter. These days even when companies beat expectations investors only want to react t the guidance. In this case, they sold Twitter stock in droves on Thursday.

This doesn’t mean that it’s not tradable. There are shorter-term levels that make it possible to profit from the short term. This is a momentum stock, so it creates opportunities for those who know how to pick proper levels to trade regardless of headlines.

Just before the earnings and almost through all of January, TWTR stock had been range-bound between $30.75 and $34 per share. It had a short stint above to $35 which targeted $37. Unfortunately for bulls, the earnings reaction ended that breakout.

The big drop on Thursday puts TWTR back at the lower end of the January range. That has to hold else it could continue lower and the target would be $29 per share first then perhaps to $28 or slightly lower. This is not a forecast but a likely scenario especially if this China tariff headline persists through next week.

So and from a trading perspective, I would wait to see how TWTR handles the downside neckline on which it currently sits before I brave a long position. The goal again is to buy it for a midterm bounce. Those who don’t mind seeing a little red through the next two weeks can jump the gun and buy the stock later today or on Monday.

There is a big gap above and, eventually, markets will want to fill it. Don’t look for expert opinions to trade it because they don’t know any better. most Wall Street analysts have it as a HOLD which is code for ‘we don’t know what to do with it so we won’t take a stand either way.’

My best weapon in the TWTR trade fight is the chart and I take it from one level to the other. If by some chance it does rebound here and closes the earnings gap to $34 per share then it would be facing the upside breakout line once more. Going above that would reopen the door to $37 or higher.

But that is two steps removed. First order of business for TWTR stock is to stop the slide, then close the gap and only then would I start risking more money to get the next leg higher.

Click here for a bonus video that I recently shared discussing GOOGL stock coming into the earnings. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.

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