High flying Square has turned volatile in the wake of efforts to cash in on the bitcoin phenomenon. In light of that, Cramer took a closer look at the charts with Tim Collins, a technical analyst and RealMoney.com contributor, to look at the stock's recent performance.
Collins told Cramer he's wary of Square stock right now. The abrupt tumble Monday on a downgrade, means you shouldn't buy it at just the first sign of stabilization. Instead, it's better to step back and survey the carnage first.
Collins started with a a weekly chart of Square showing a series of Fibonacci levels. (Leonardo Fibonacci was a medieval mathematician who discovered a series of recurring ratios in nature that turn up in everyting from snail shells and pine cones to, of all things, the stock market.)
According to Collins, the red lines on the chart represent retracements of the rally from Square's February lows. The green lines show retracements of the run since May -- two high-volume periods where a lot of investors jumped into the stock.
Based on the most recent swing -- the green lines -- the pullback in Square might stop at $38.79, which would represent a 38.2% retracement of the recent rally. Or it could go to $35.64, which would be a 50% retracement, or it could even fall to $32.48, for a 61.8% retracement. Collins has a hard time believing that Square will give up more than half of its run since May, so he expects Square will be able to find a strong floor of support at either the $35 or the $38 level. For the whole move since February, a 38.2% retracement would take Square to just under $37.
A more normal weekly chart of the action in Square shows it hasn't traded beneath its 13-week moving average, a medium-term measure of the stock's trajectory, all year. Recently the stock caught fire and pulled away even further from its moving average, which is currently at $35 -- near the support levels Collins pointed out in the previous chart. Square appears to have a floor somewhere in the mid-$30s, compared to its current price of around $42.50.
While Collins is not predicting that Square will trade down to those levels, he wouldn't recommend trying to bottom fish until it sinks to the mid- to high $30s because, from a technical perspective, Square is not a bargain.
In contrast with Square, Collins thinks long-suffering Allergan, may be in a better position. The stock is a holding in The Action Alerts Portfolio. Shares have fallen from more than $300 two years ago to around $171.
Based on what he sees in the charts, Collins believes Wall Street's hatred of the stock may have gotten too excessive and Allergan could be due for a bounce. In the past couple of months the stock has come down hard, but after this kind of move it has shown a tendency to rebound. Collins points to the two vertical lines in May and November of last year on the stock's chart.
In both cases, Allergan sold off hard, trading through the bottom of its Bollinger Bands -- a measure of volatility. Both times, the stock rebounded hard, even though it remained in a long-term downtrend. Allergan just broke down through the bottom of its Bollinger Bands again. If the previous pattern holds, Collins expects perhaps a 15% bounce.
By other measures Allergan is very oversold. The stochastic oscillator measures when a stock has come up or down too far, too fast. In Allergan's case, this indicator is in extreme oversold territory. The last time Allergan got this oversold was in December of last year, and the stock proceeded to rally 20% over the next couple of months. Collins thinks this could be a $35 up, $5 down scenario.
Over on Real Money, Cramer says demand and supply in the cycle of DRAMs and Flash memory commodities are very complicated. Get more on his insights with a free trial subscription to Real Money.
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At the time of publication, Cramer's Action Alerts PLUS had a position in AGN.