Chart Of The Day: Twitter Shares May Be Oversold But Stock Still In A Downtrend

Smart money fund managers and investors have become passionate about Twitter (NYSE:TWTR) stock. ARK Invest founder Cathie Wood bought into Twitter's dip after the stock fell to a 52-week low near $41 when co-founder and CEO Jack Dorsey announced in late November that he was stepping down from his leadership role.

ARK is already one of TWTR's largest shareholders, but fund manager Wood's additional investment increased the firm's holdings by 1.1 million shares on Tuesday, its biggest single-day purchase of Twitter, which ARK has been buying up since July 23.

Wood isn't the only one with conviction on Twitter. Mark Newton, Managing Director and Global Head of Technical Strategy for Fundstrat Global Advisors, believes the stock is bottoming out.

Newton is relying on the expectation that the stock's 50% retracement since February increases the chances of a reversal. Moreover, the shares are extremely oversold and are finding demand at the 2018 and 2019 highs, according to Newton “a very key level of support.”

Finally, Newton noted that “the risk-reward” proposition for him “is increasing, getting very, very good.” He added:

“I think the stock bottoms out in the next couple of weeks. It should start a slow rise up to the low- to mid-50s.”

While we could agree with Newton regarding the risk-reward proposition, we disagree on any sign of a bottom, irrespective of how oversold the stock might be.

Based on its RSI, it's the most oversold it's been since 2016 on the weekly chart. Yet even so, the price found support by the 200 WMA.

We're more concerned about the price itself. It has registered a second weekly trough, establishing and confirming a peak-and-trough downtrend, framed within a falling channel, after violating the uptrend line since the March 2020 bottom.

Therefore, we consider buying into the stock now to be a contrarian, aggressive move against the primary trend. However, the risk-reward ratio Newton mentioned and the expectation of buyers bidding the price back up toward the sellers' downtrend line and channel top may encourage some traders.

However, such risk-takers should be aware that they're going against the underlying downtrend, which means there's no predicting when the trend might turn and smack them over the head. Therefore, taking a long position now is not for the faint of heart.

Conservative traders should wait for the price to scale back toward the top of the falling channel.

Moderate traders could risk a long position if the price nears last week's lows.

Aggressive traders would enter a long position, provided they've read and understand the full analysis—not just the trade sample—and are prepared to lose the position. Here is just one example to demonstrate a plan's basic requirements:

Trade Sample – Contrarian Long Position