Shares of global Internet media company Yahoo (YHOO) last Friday rallied nicely on the back of a letter from an activist investor asking the company to consider a potential combination with web services company AOL (AOL). The reaction in Yahoo stock also looks promising through a technical lens, as it held the gains and closed Friday’s session at the highs.
Active investors and traders could now consider initiating a long position in YHOO.
Specifically, around midday Friday, we began to see reports that activist investment company Starboard Value LP said it built up a significant stake in Yahoo and wrote a letter to the company, pushing it to explore a deal with AOL.
Investors have focused on Yahoo stock more recently as Chinese e-commerce giant Alibaba (BABA) tapped the public markets — and Yahoo owned a 22% stake at the time of the IPO. Value investors have argued that Yahoo stock is undervalued, saying that the stock barely represents its stake in Alibaba.
Activists investors can be an investor’s best friend, though it’s never a lock that an activist will succeed. Sometimes shares rally for only a few hours after an activist investor letter, but considering that YHOO stock closed at the day’s highs on Friday, investors can feel OK having a little confidence now.
Yahoo Stock Charts
Looking at the multiyear weekly chart of Yahoo stock, note that the sharp rally of 2013 finally bumped YHOO into its 2006 highs in January of this year. The stock then consolidated for a few months in a constructive manner, which could be looked at as the “handle” of a major “cup and handle” pattern that stretches all the way back to 2005. Through this lens, Yahoo stock is extremely constructively positioned to push toward the $70 area within six to 12 months.
On the daily chart, note that Yahoo stock came under pressure around the time of the Alibaba IPO, and by so doing retraced its breakout past diagonal resistance from mid-August. On Sept. 23, YHOO found support at its rising 50-day simple moving average (yellow line), and with Friday’s 4.39% rally, Yahoo has now closed the down-gap from Sept. 19 — the day of the offering.
Active investors could now use the Sept. 23 lows to trade against on the long side with a profit target near $48. But note: Considering we’ll probably see a heavy flow of news around YHOO in coming days and weeks, a somewhat volatile trading period could lie ahead.
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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.