Editor’s note: Serge Berger, the head trader and investment strategist for The Steady Trader, will be providing the Trade of the Day until Sam Collins returns on June 27.
Yahoo (NASDAQ: YHOO) – The stock has taken a serious beating since early May, as news broke that the company was caught up in business shenanigans in China. The issue was that successful Internet entrepreneur and stakeholder in Alibaba Group, Jack Ma, secretly transferred Alibaba’s online payment service Alipay to a private firm he is in control of.
Alipay is a major asset for Alibaba, and Yahoo is a major shareholder in Alibaba. Fears of loss of revenue for Yahoo ran wild when the news broke on May 11, and Yahoo’s stock price fell more than 20% over the following four weeks.
Fundamentally, YHOO is expected to return to positive revenue growth in the second half of 2011, and from what I can gather, the value of the company’s Asian assets (taking into consideration the potential fallout of Alipay) is significantly more than what has been discounted in the stock price.
On the three-year chart, we note two things. First, YHOO found major resistance in 2010, and so far in 2011, in an area between $18.50 and $19. At the time of the Alibaba news, the stock was trading in that area and has since been knocked down to support.
Second, the support area that YHOO currently sits on is an upward trend that originated back in November 2008, and was successfully tested in September 2010.
Zooming in closer on the short-term chart brings us to the trading action yesterday. First, note that yesterday morning, YHOO gapped down along with the rest of the market. The stock, however, found support at the three-year uptrend (blue line) mentioned above and managed to close above it. Stochastics (not shown) are diverging from the stock price as YHOO made a new recent low while stochastics are climbing.
For aggressive traders, a long trade could be entered today with an honest stop at yesterday’s lows and a target price of $15.60. Mind you, the ongoing broader market weakness makes longs more difficult here, so stops must be adhered to with great discipline.
For less aggressive traders, a better probability long trade in YHOO would set up after a bullish daily close from current levels. Stops in that case could still be placed at yesterday’s lows with a profit target near the 200-day simple moving average (red line).
