Trading Nation

The last time Square flashed this bearish sign, it rallied 24%

Square an opportunity for value-oriented investors: Strategist

It's hip to be Square.

The underperforming stock caught a bid Thursday, rising nearly 4% after Wells Fargo analysts upgraded the payment company to an outperform rating from market perform, saying the negative sentiment is close to peaking.

The bounce followed what's known as a death cross in Square's chart, or when a stock's 50-day moving average dips below its 200-day moving average. Death crosses are typically viewed as bearish signs and have proven to be reliable indicators of impending bear markets.

But the last few death crosses for Square, whose CEO is Twitter chief Jack Dorsey,have played out to the contrary of Wall Street's expectations, says Matt Maley, chief market strategist at Miller Tabak.

"The previous two times we had a death cross in the last year or so, it was an absolutely horrible signal," Maley said Thursday on CNBC's "Trading Nation." "It was actually a great time to buy the stock."

When Square's moving averages hit the death cross in late December, the stock mounted a 45% rally from trough to peak. When that happened again in May, the stock soon saw a 24% rally.

"This time, it's about a week after the death cross took place, and the stock's starting to bounce back," Maley said. "So, it looks like it's going to be another situation where … this death cross is going to be a contrarian indicator and the stock wants to go higher."

Nancy Tengler, chief investment strategist at Tengler Wealth Management, was also positive on the stock, calling Wells Fargo's move "a smart upgrade."

"I like it better when analysts upgrade stocks after the price goes down rather than at all-time highs, but it was a little early for us," she admitted in the same "Trading Nation" segment. "We were circling, hoping to get in, and it's bounced very nicely on this upgrade."

Even so, Square's story still isn't entirely bullish, Tengler warned.

"There are fundamental challenges, to be sure. J.P. Morgan's entering the space that Square is trying to go after, and the sale of [Square's on-demand delivery service] Caviar will be good for margins, so there's good news, bad news," the strategist said.

"But I do think that, for value-oriented investors, this is a potential opportunity if you aren't as limited by your discipline as I am," Tengler said. "So, I like this story."

Square is down more than 24% since Aug. 1 and nearly 39% off the 52-week high it reached last October. With an 8% rise this year, it's the worst-performing stock in 2019 among its rivals Visa, Mastercard and PayPal.

Disclosure: Tengler Wealth Management owns shares of Visa.