Whether it was the departure of key executive, a bearish market tide or the lingering effects of the Alibaba (BABA) spinoff news that sent Yahoo (YHOO) shares lower today isn’t clear; it was likely a combination of all three factors.
What is clear, however, is the fact that none of the recent action from YHOO stock is technically surprising. Indeed, it has all been unfurling right on cue.
As for where Yahoo stock is headed next, that’s up in the air, and will largely be decided by how the company performs in the current quarter, and how it addresses a handful of items concerning investors right now.
The good news is, we know what to look for.
The Recent Action Makes Sense
This year won’t be a memorable one for Yahoo investors. Shares are down 35% for 2015 year-to-date, and at the present time, are pointed lower again.
The bulk of that pullback materialized after YHOO stock soared on the heels of the Alibaba IPO, which drove a $9.4 billion windfall for Yahoo last September. Yahoo still retained 383 million shares of BABA after the public offering was made, but in light of the fact that BABA shares have struggled in the meantime — in addition to the gradual realization that selling the remainder of its stake in Alibaba would create a huge tax liability — Yahoo stock has drifted lower. Even the strong reversal effort staged in early October has faded.
There’s a method to the madness though.
It’s an unpopular idea among investors who strictly adhere to fundamentals in their analysis, but you can tell a lot about a stock’s future based on its technical history. No, charts aren’t perfect tools, but they provide a trading framework when little else does, and they do a good job of reflecting the market’s ever-changing opinion of a particular company’s fundamentals.
They can also flat-out tell you where breakouts and meltdowns are apt to begin.
YHOO stock isn’t an exception to this norm. Indeed, YHOO shares have plotted two very important (and unsurprising) lines in the sand everyone of all investing types should note.
Think October’s low of $27.20 and last week’s high of $36.39 are just coincidences? Think again. Based on the span between the August 2011 low — a major technical bottom — and the peak from November, key Fibonacci retracement lines are at $26.96 and $36.77 … almost in line with the recent trough and peak, respectively.
Click to Enlarge Fibonacci lines are a derivative of mathematical patterns that occur in nature. Their application to stock trading is based on the premise that since traders are still just men and women, and part of nature, they collectively think and trade with respect to natural numerical patterns.
In other words, the $27.20 level and $36.39 level for YHOO stock are psychologically significant price points. They’re made even more significant by the fact that shares just made a major low at one, and a fairly important peak at the other.
Broadly speaking, while Yahoo shares may dish out some worthy swing trades while trapped between these two Fibonacci lines, the proverbial big Kahuna moves will only likely materialize outside of that trading range. The way shares are getting comfortable within that range suggests traders don’t quite know where it’s all going.
One thing is for sure though — there’s little doubt that something big is brewing. Talks of some sort of sale, a turnaround effort, something of an exodus of key management, and even chatter that CEO Marissa Mayer will soon be gone are all a little too frenzied to expect “business as usual” for much longer.
Click to Enlarge In the meantime, today’s near-5% stumble from Yahoo stock was no mere 5% stumble. The move pulled YHOO below the 20-day, 50-day, and 100-day moving average lines in one fell swoop. There’s a minor floor possibly waiting at $32.15, where shares hit a low in mid-November. The big floor to watch for, though, is that late-September low around $27.20.
Bottom Line for YHOO Stock
Whether Yahoo shares are bullish or bearish is largely a matter of timeframe, although generally speaking, YHOO stock is encountering more headwinds than tailwinds.
The short-term headwind may be more market related than company driven, though Yahoo isn’t doing much to help its stock right now. The long-term trend is … let’s call it unproven for the time being.
A pullback to $27.20 coupled with some good news for a change could set up something bullish, turning a short-term sell into a long-term buy. If instead Yahoo stock breaks below $27.20, then even the long-term fans will have something to worry about. In the meantime, however, long-termers need not fret too much.
Make no mistake though — the rhetoric and the sentiment for Yahoo will have to change for the better, and soon, if any short-term dip is to become a long-term buy.
It’s going to be on the company’s shoulders to foster that paradigm shift.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
