It's important to know the difference between a broken stock and a broken company, Jim Cramer told viewers of his Mad Money program Wednesday evening. A broken stock can be fixed, but a broken company can be hazardous to your portfolio.
Back on August 1st, shares of payment processor Square (SQ) traded for $83. Just days later, they crashed to $59 a share. Is the plunge a buying opportunity or a warning sign?
Cramer said Square is in a great business. Payment processing is only gaining in popularity as every merchant goes digital, and SQ has the added benefit of Square Capital, where it uses what it knows about merchants to make loans that no other lender can make.
So what's driving the stock's recent fall from grace with investors? Cramer said Wall Street appears to be fed up with the company's weak commentary and guidance after every earnings report, no matter how good that report may be. It's also taking issue with CEO Jack Dorsey's seemingly part-time status as he runs both Square and Twitter (TWTR) . But after a pair of recent upgrades from analysts, Cramer said he's siding with the bulls when it comes to SQ. The company has a 46% long-term growth rate, which justifies its share price of 8.3 times sales. The company has a lot of growth ahead and when it comes to payments, size and execution matters and SQ continues to deliver.
Let's see if the charts can deliver.
In this daily bar chart of SQ, below, we can see that prices were mostly in a sideways trading range from January with buyers coming in around $60 and sellers capping the upside in the $80-$85 area.
Prices crossed above and below the 50-day and 200-day moving average lines but things look like they have shifted direction since the gap to the downside at the beginning of August. Prices are now below both moving average lines with both slopes being negative (bearish). It looks like the buyers in May around $60 are not coming back in again.
The On-Balance-Volume (OBV) line is down from July levels and signals that sellers of SQ have become more aggressive.
The Moving Average Convergence Divergence (MACD) oscillator turned down in early August to break below the zero line for an outright sell signal. The oscillator looks like it is curling over to another sell signal now.
In this weekly bar chart of SQ, below, we can see that prices are below the flat 40-week moving average line. This could be a new low close for the move down for SQ if we close this weak on Friday.
The weekly OBV line is soft and the MACD oscillator is in a sell mode below the zero line.
In this Point and Figure chart of SQ, below, we ignore volume and time, and filter out smaller jiggles. The decline below $60.42 has opened the way for further declines. A bearish price objective of $42.85 is now being indicated. A rally above $64 would change the picture.
Bottom line strategy: Unless we are seeing something like a bear trap on the chart it looks like SQ could decline to retest its December nadir. Let's see how it behaves if it does weaken further.
