This Square Buy Signal Has Never Been Wrong

A pullback to this trendline has resulted in outsized one-month gains

Square Inc (NYSE:SQ) pulled back earlier this week on a negative earnings reaction. Analysts weren't concerned, though, with Stifel upgrading the security to "buy" from "hold," and Jefferies saying it "would buy the dip." What's more, the retreat brought SQ stock back to a trendline with historically bullish implications -- suggesting the equity could be on the verge of another big breakout.

Specifically, Square stock is now trading within one standard deviation of its 80-day moving average after a lengthy stretch above it. For the purpose of this study, Schaeffer's Senior Quantitative Analyst Rocky White defines that as the equity trading above the moving average for 60% of the time over the past two months, and closing north of the trendline in eight of the last 10 sessions.

In the last six times this signal has sounded since Square first began trading publicly in November 2015, it's gone on to average a 21-day gain of 20.15%, and has been positive one month out 100% of the time. Based on the stock's current perch at $48.89, another move of this magnitude would put it near $58.75 -- and above its March 21 record high of $58.46.

A short-covering rally could also add fuel to a Square rebound. After falling from its March 15 record peak of 38.62 million shares in the April 1 reporting period, short interest has turned higher. The 35.92 million SQ shares sold short represent 13.6% of the stock's available float, or nearly four days' worth of pent-up buying demand, at the average pace of trading.

And for those wanting to bet on Square's next leg higher with options, the stock has consistently rewarded premium buyers over the past year. This is based on SQ's elevated Schaeffer's Volatility Scorecard (SVS) reading of 95 (out of 100), which indicates the equity has tended to make outsized moves over the last 12 months, relative to what the options market has priced in.