PayPal: Signs Of A Future Reversal

No one can predict the bottom for sure. This is an axiom. However, there are indirect signs that allow us to assess the likelihood that the stock is at least approaching the critical moment when a reversal becomes possible. Interestingly, in the case of PayPal $PayPal(PYPL)$ , there are several such signs.

Super-exponential fall

In nature, and in the stock market in particular, linear processes are extremely rare. For example, the number of bacteria grows exponentially if there are no restrictions in nutrient resources and living space. In the field of the stock market, the most striking example of exponential growth is the long-term trend of Amazon $Amazon.com(AMZN)$ stock the price:

However, sometimes in the stock market there is not just exponential growth, but super-exponential growth. For example, just such a growth trend in the price of Bitcoin $Bitcoin Services, Inc.(BTSC)$ was observed in 2017-2018 on the eve of a strong correction. Here's what it looked like on a log graph:

Generally speaking, the super-exponential growth is rarely observed in nature, and as a rule, it indicates an unstable state. Particularly in the stock market, it precedes a major trend reversal.

Now let's look at the behavior of the price of PayPal shares. Approximately from the end of July 2021 until February 2022, the company's share price was declining in accordance with an exponential trend - it was a normal correction. But from February to today, the price has been declining at a super-exponential rate:

The super exponential rate is very fast and means that the price of Paypal can drop even lower in a very short time. No one knows how far the price may fall. But the very nature of the current price drop indicates that, in general, the correction is in its final phase.

Abnormal volume and short ratio

The volume of transactions in PayPal shares has recently reached unprecedented levels for the company. On Feb. 2, daily volume hit a record 136 million and continues to be above long-term averages:

Increased trading volume means that the price has reached a level where relatively many investors are making long-term decisions about their stocks. Indirectly, this also means the bottom is approaching.

Now about the short interest ratio.

A bit of theory. Short interest is the total number of shares that have been sold by investors, but have not yet been covered or closed. But this information alone is not as valuable as when combined with trading volume. Therefore the derived indicator "Days to cover" is more indicative. It measures the expected number of days to close out a company's outstanding shares that have been sold short:

Days to cover = short interest / average daily volume

In the case of PayPal, "days to cover" is now below the average for the past five years. In my opinion, this means that the bearish momentum regarding PayPal is fizzling out:

PayPal's reaction to market dynamics

A relatively useful technical indicator of stock behavior is the Beta coefficient. In very simplified terms, this coefficient indicates how
much the price of a given stock tends to move in the same direction as the market.

However, one can go further and evaluate how the price of a given stock tends to move only when the market is rising, and only when the market is falling. I call such indicators "Bullish" and "Bearish" Beta.

In the case of PayPal, the rolling, monthly "Bullish" Beta dropped to zero in January. This means that the price of the PayPal share did not react to the growth of the Nasdaq index. But now this indicator is at a level above one. This means that on average, when the Nasdaq index rises by 1%, the price of PayPal shares tends to rise by more than 1%, to be more precise - by 1.7%:

Simultaneously "Bearish" Beta is now at zero. This means that the price of the company's shares is insensitive to negative market dynamics.

This article was devoted to the technical aspects of the price behavior of companies, but the conclusion does not change. Even in the medium term, it is not worth selling the company's shares now. A reversal is likely soon.