by Serge Berger | December 9, 2013 8:12 am
Book retailer Barnes & Noble (BKS) tumbled last Friday on the back of news around an SEC investigation, causing notable damage on the chart of BKS stock as investors fled.
Last Friday, the news wires reported that BKS disclosed an investigation by the U.S. Securities and Exchange Commission into its restatement of earnings after a former employee broke word of some improper accounting around its Nook digital reader.
Barnes & Noble has been under the spotlight in recent years while its net income turned to losses in a continuous struggle against the increasingly competitive world of retailing in the digital age. Its Nook e-reader/tablet has arguably not lived up to all it could be, and considering its central role in the company’s retailing strategy, any accounting issues (if true) surrounding this product could mean big trouble for BKS stock.
One of my first trading mentors used to say that some of the highest-probability short-side bets come on the back of “accounting irregularities,” particularly once the SEC gets involved. Over the years, I have taken this particular advice to heart and can say that I too have found the same to be true.
While shorting stocks is not for everyone, those investors long a stock that discloses accounting issues and SEC investigations would be wise to also cut or close those positions, at least until more clarity arrives. The uncertainty brought about by such events usually causes stock volatility investors’ emotions become rattled.
From a technical perspective, the multiyear chart of BKS stock hasn’t seen much trending activity, which looks particularly weak considering the uptrend in the broader equity markets in recent years. For the most part, Barnes & Noble has been stuck in a trading range, which considering the aforementioned fundamental issues with the company, does make sense.
Although BKS stock has managed to work itself higher off its April 2011 lows, the series of higher lows since has not been accompanied with any trustworthy higher highs. The higher highs since spring 2011 have been jerky and took the shape of spikes as they were quickly sold into.
On the daily chart, BKS stock on Nov. 29 bumped into a good confluence resistance area, made up of its 200-day simple moving average (red line), the upper end of a two-month up-trending channel (black parallels), and on the same day left behind on its daily chart a bearish candlestick. This first warning signal was then confirmed with Friday’s 12% haircut in the stock, which pushed it below its 50-day MA.
From here, considering the still-fresh news of the SEC investigation into the company’s accounting practices, odds are not in favor of BKS stock bulls and in fact offer those looking for shorting opportunities decent odds at a successful trade with the next few weeks.
However, considering how jumpy BKS could be around any new news, you might be better off just staying away from Barnes & Noble in general.
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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.
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