Former momentum darling and blockchain play Square, Inc. (SQ) has recovered from a 15-point slide that ended 2017 on a sour note, but the stock is unlikely to enter a new uptrend until the second or third quarter at the earliest. Instead, traders should look for volatile range-bound action that follows the old market adage, "The bigger the move, the broader the base," denying longer-term profits to bulls and bears.

The company's blockchain exposure has transformed from tailwind into headwind in 2018, with bitcoin dropping more than 60% off its 2017 high. The controversial digital currency has bounced strongly into March but is still in corrective mode, shaking out a massive supply of weak hands that jumped on board, hoping to become overnight millionaires. Square is paying the price, with market players ignoring other fundamentals due to its tightly levered price action. (See also: Bank of America, JPMorgan Call Cryptocurrencies a Threat.)

SQ Weekly Chart (2015 – 2018)

The Bay Area company came public at $11.20 in November 2015, entering a narrow range that broke to the downside at the start of 2016. The stock found support near $8.00 in February and doubled in price into April, when the recovery wave failed, dropping the stock to the prior low two months later. It completed a double bottom reversal in August and turned higher, carving a slow-motion uptick that reached the 2016 high in January 2017.

A February breakout caught fire, generating healthy gains that escalated in May. The rally stalled in July, attracting ill-timed short positions that got blown out of the water when the stock took off in a momentum-fueled October advance, reaching an all-time high at $49.56 in November. Price action since that time has carved four waves in an ascending triangle that should print at least five waves before giving way to an uptrend or major reversal.

Weekly stochastics fell to the deepest oversold technical reading since 2016 in December 2017 and turned higher, reaching the overbought level two weeks later. The indicator flipped into a sell cycle in February but has crossed higher near the indicator panel's midpoint in a pattern with a nasty reputation for setting off false buying signals. In turn, this suggests that the current uptick will fizzle out and yield a fresh decline that may align with a bitcoin sell-off through $10,000.

Weekly Bollinger bands organize price action, with the momentum-fueled advance clinging to the upper band for more than seven weeks into the November top. The sell-off into December held support at the 20-week simple moving average (SMA), while the subsequent bounce generated a bearish divergence because it failed to reach the upper band. The moving average held support once again during the February decline, suggesting that the next downswing could reach $40 to $41. (For more, see: Square Is Becoming a Bank.)

SQ 60-Minute-Term Chart (2017 – 2018)

The stock posted a gap between $47 and $48 after the December high, while two recovery waves stalled at the gap bottom, failing to pierce resistance. A Fibonacci grid stretched over triangle extremes places hidden support at $42 and $44, predicting bounces near those levels during the next downturn. The .382 retracement level has aligned with the 20-week SMA, while triangle support will reach that level in April. That could presage major testing at the start of the second quarter.

The technical outlook will improve if the stock can trade through the gap and reach $50, but the triangle pattern looks incomplete, in need of a third decline before buyers or sellers take control of longer-term price action. On-balance volume (OBV) is cooperating with bulls, sitting at an all-time high, but this healthy supply of shareholders may abandon ship if the stock turns lower and volatility starts to escalate.

The Bottom Line

Square is consolidating strong 2017 gains in a triangle pattern that has carved an incomplete price structure, predicting at least one more trip into the upper $30s or low $40s. (For additional reading, check out: The Digital Wallet and the Future of Payments.)

<Disclosure: The author held no positions in aforementioned securities at the time of publication.>