Social media king Twitter Inc. (TWTR) - Get Twitter, Inc. Report is due to report earnings next Thursday before the market open. Wall Street analysts, on average, expect Twitter to report revenue of $535.61 million on earnings of 5 cents per share.
Shares of Twitter have made an amazing run over the last three months, with shares up a whopping 38%. What's amazing about that rally is that it has come on virtually no major news, besides the naming of a new CFO. Momentum investors continue to bid the stock up ahead of the quarter, and some on Wall Street are predicting that Twitter will repot its first ever quarterly profit.
However, one Wall Street firm sees trouble ahead for Twitter, after Morgan Stanley's Brian Nowak said in a note on Thursday that he expects the stock to eventually drop 50% due to lack of spending from advertisers. If Nowak is right, then shares of Twitter will eventually trade down to $10 a share.
Fortunately for the Twitter bulls, nothing in the price action and trend for the stock at this time suggests that a move to $10 a share is in the cards anytime soon. In fact, it's the exact opposite, with shares of Twitter clearly in control of the bulls since its April low and 52-week low of $14.12 a share.
One of the less talked about reasons that might potentially be fueling shares of Twitter higher here is the high short interest. The current short interest as a percentage of the float for Twitter stands at 9%. That means that out of the 636.30 million shares in the tradable float, 57.15 million shares are sold short by the bears. This is a decent short interest, and with 3.5 days-to-cover, it's more than enough to spark an earnings short-squeeze trade when Twitter reports next week.
If you take a look at the chart for Twitter, you'll notice that this stock has been uptrending strong over the last two months, with shares moving higher off its low of $16.27 to its recent high of $20.88 a share. During that uptrend, this stock has been consistently making higher low and higher highs, which is bullish technical price action. That strong uptrend has now pushed shares of Twitter within range of triggering a major breakout trade that could squeeze the shorts post-earnings.
Traders should now look for long-biased trades either ahead of the quarter, to anticipate the move, or after, if Twitter manages to break out above some key overhead resistance levels at $20.88 to its gap-down-day high from last October at $21 a share. Look for volume on that move that registers near or above its three-month average action of 19.69 million shares.
If that breakout triggers post-earnings, this stock will setup to re-fill some of its previous gap-down-day zone from last October that started at $25.25 a share. The shorts will be on the run post-earnings if Twitter trades into that gap, so some possible upside targets are $25 to even $30 a share.
The bottom line, Twitter has major momentum heading into the quarter and the stock is filled with shorts. If we get a solid report, expect the momentum to continue as the shorts panic out of their positions, fueling the stock even higher. The trend right now for Twitter favors the bulls, so a strong quarter and bullish forward guidance will be the next catalyst to burn the shorts.
Twitter shares fell 2% to $20.11 by Friday's close.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.