MW What the big 'key reversal' pattern in MicroStrategy's stock chart could mean
By Tomi Kilgore
The behavioral pattern suggests a big battle at a key level that was convincingly won by bears
The swing in MicroStrategy's stock to a big loss from a big gain on Thursday produced a classic chart pattern that can act as a warning of further weakness.
The software company and bitcoin play's stock's $(MSTR.AU)$ trading pattern over the past two sessions comes right out of technical textbooks as a "key reversal." But it's always good practice to understand the conditions in which it appeared - and how such patterns worked in the past - to make judgments about what it might mean for the stock's outlook.
Keep in mind it's not the drawn chart pattern that determines the stock's fate; it's the psychology behind the trading behavior that produced the pattern that can set the tone for the stock.
After such a big selloff, there's often some giveback as participants assess the new landscape. And the magnitude of that bounce can also be very telling.
If there's a bright side for bulls, the fact that the reversal occurred on a daily chart, and given prior key reversal appearances, any continued weakness would still be part of a short-term outlook. While it's certainly a warning sign, there's still nothing to suggest the long-term trend is in trouble.
The key reversal is a two-day pattern. On Wednesday, MicroStrategy's stock gapped higher at the open, meaning it opened above the previous session's intraday high.
It rose to an all-time intraday high of $504.83 before pulling back but still closed above where it opened, suggesting bulls remained comfortable holding up the stock at elevated levels. It's not a surprise, as the company has been buying up bitcoin (BTCUSD), and bitcoin kept rising toward record highs.
On Thursday, the stock gapped higher again, opening at $535.63, or 6.1% above Wednesday's high. It rose to another all-time high, at $543, which represented a 14.6% gain on the day, then the bottom fell out.
It tumbled to an intraday low of $371.84 before the dust settled, and closed down 16.2% on the day at $397.28, which was 13.1% below Wednesday's low of $457.30.
What appeared to cause the reversal was a post on X, formerly Twitter, by well-known investor Andrew Left of Citron Research, who said he remained bullish on bitcoin but was hedging that bet by shorting MicroStrategy's stock, which is a bet that prices will fall.
Read: MicroStrategy's stock turns south to snap 3-day streak of double-digit gains.
Sure, Left is well-known, as he has made some pretty good "short" calls some years back. But he's also known for being on the losing side of the short-squeeze that turned GameStop Corp. $(GME)$ into a "meme" stock in early 2021, and for being charged by the U.S. Securities and Exchange Commission earlier this year with misleading investors with his trading calls.
While his post was certainly a body shot for a stock that was soaring without a net, should it have been enough to cause bulls to turn tail, those same bulls that fought off a pullback in the previous session? And was it enough to embolden bears to take charge even as bitcoin continued to rally?
That fact that it was enough suggests the apparent strength was actually precarious, that the market was ready for a reason to flip to bearish.
And it's not like the reversal occurred in a vacuum. Trading volume on Thursday was a record 100.4 million shares, which means it was a hard-fought battle with a lot of participants. Wall Street traders like to say that volume is a confirming factor.
Basically, the bears won convincingly - fair and square.
The question is whether bulls have the conviction to keep pushing, and if bears have lost the confidence to fight back.
The stock was up 3.3% in morning trading Friday, but continued to hold below the first key resistance zone.
That puts the early gain into the category Wall Street traders like to call a "dead cat bounce." The lack of a bounce suggests bulls are reluctant to test overhead selling pressure, amid fears that it would trigger another bear strike.
Next is to look back at what happened the last time there was a textbook key reversal, and if current conditions are similar.
The last one appeared on Feb. 15, the day after the stock had jumped to close at a 2 1/2-year high.
The stock opened higher the next day but quickly sold off. But the weakness didn't last, as the stock bottomed three days later, 6.3% below where it closed on the reversal day.
One important difference at that time, however, was that volume didn't stand out. On the day bears appeared to take charge, volume was 23.8 million shares, which was less than on Feb. 9, when the stock soared 15.7% to break out of its doldrums on volume of 24.7 million shares.
This shows the market dynamics behind that key reversal are very different than the one that appeared on Thursday.
While there's still no reason to believe a new long-term trend has started, it may be wise to not be as quick in buying this dip as bulls were in February.
-Tomi Kilgore
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November 22, 2024 10:25 ET (15:25 GMT)
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