Our Review of Yelp Stock: You Should Short It.

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The slump in local business review company Yelp Inc (YELP) continued Wednesday with another 3% selloff. The latest weakness in YELP stock seems to be coming on the back of news that Facebook (FB) has launched a new “Places Directory” that could rival Yelp.

beat the bell stock investing adviceSpecifically, the new Places Directory on Facebook allows users to share their location and where friends checked in. Users also can leave comments/reviews for the places and the directory thus also allows people to connect through a common ‘place’ interest.

From a technical perspective, YELP stock looks and feels weak in both the near- and medium-term time frames, and after Wednesday’s renewed weakness, the stock looks ready to tumble even lower.

In the bigger picture and before looking at the charts of YELP stock, it is worth noting that shares of other social media stocks like Facebook and Twitter (TWTR) have also traded in a weak fashion as of late. This could be taken as a sign of weakness for the broader market as these momentum names are losing their luster (at least for the near-term). In fact, both TWTR and FB gapped lower after their most recent earnings results and have not been able recuperate those loses since.

From a cyclical perspective, it also is worth noting that the advertising business — which essentially is what TWTR and FB are in — is late cyclical, so it makes sense that they’re beginning to roll over this late in a cyclical bull market.

YELP Stock Charts

Looking at the multiyear weekly chart of YELP stock, we see that the price action since August 2013 has formed what could be looked at as a big head-and-shoulders topping pattern, with the head of the pattern having formed in the February/March time-frame. The last rally attempt over the summer then faded into early September, where the stock began to slide lower again. From a momentum perspective, the Relative Strength Index (RSI) is clearly pointing lower but not oversold, which is to say that the neckline (black horizontal) could soon snap and let the stock fall further.

yelp stock charts weekly
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As a note: At 15% short interest, YELP stock has plenty of short sellers circling it, but not so much that it should scare short sellers of a major short-covering rally just yet.

On the daily chart, we see that after gapping lower following its earnings report on Oct. 23, Yelp then settled into a tight consolidation range, which allowed us to draw a diagonal support line connecting the May lows with the October lows. With the lower high from September and another lower high from October weighing on this support line, it was only a matter of time until price would break through, as it marginally did Wednesday.

yelp stock charts daily
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Active investors and traders could now look to short YELP stock around the $55-$56 area for an initial price move toward $48-$50, using the $60 area as a stop-loss.

YELP can be a volatile stock, so to manage your risk, play with a reduced position size.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/11/yelp-yelp-stock-ripe-short-sellers/.

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