Put eBay Hope on Hold Until 2007

The online auctioneer's improving chart doesn't offer enough promise -- yet.
Author:
Publish date:

This column was originally published on RealMoney on Nov. 14 at 12:07 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

eBay

(EBAY) - Get Report

has begun another hopeful recovery in the last three months. But has it really bottomed out and started a longer-term uptrend that eventually will return this stock to its glory days? Or has this innovative company topped out for good as competitors multiply and profit margins continue to shrink?

It remains the top-performing Net stock of the post-bubble era, despite well-publicized misfires in recent years. The stock has risen almost 500% from a split-adjusted low at 6.76, printed in late 2000. This six-year performance is even more impressive than

Google's

(GOOG) - Get Report

historic run after it came public two years ago.

The auction-house giant topped out in December 2004, about the same time it raised fees for buyers and sellers. The ensuing controversy marked eBay's first black eye since its late-1990s IPO. Undoubtedly, patient investors thought the storm clouds would pass after the first shock wave, but that initial decline eventually turned into a full-blown downtrend.

The company tried to shake things up in 2005 with its expensive purchase of Skype, the quirky Net phone provider. But the awkward acquisition did little to stop the stock's persistent slide. The unrelenting downtrend kicked back into gear in a big way at the start of 2006, with price dropping to a three-year low in August.

The monthly chart highlights this stock's dramatic rise. Note how it printed the majority of its early gains in the first six months after it came public in 1998. This uptrend erupted during the initial wave of Net excitement that culminated in the

Nasdaq

bubble of early 2000. Price then peaked at the same time as the broad market in March of that year.

The stock dropped into a multiyear consolidation period after its 2001 low. Then things started to heat up again in late 2002 when eBay began a steady rise back to the bubble high at $31.88. It reached this level in December 2003 and broke out in a powerful rally, doubling in price over the next year.

The journey off the December 2004 top has been a painful one, with the stock falling more than 35 points from that lofty level to its August 2006 low. Note how the 2005 uptrend marked out a bear-flag pattern that signaled the eventual breakdown earlier this year. Unfortunately the recent bounce is unimpressive, given the size of the prior downtrend.

Both down-legs of this weekly pattern show completed Elliott five-wave decline patterns. This raises a major concern for this stock's future. Does the broad downtrend show a completed A-B-C correction that will give way to a major recovery, or will a final downdraft complete an even larger-scale five-wave decline?

The jury is out on the final resolution of this Elliott Wave issue. It's significant that the second down-leg equals 127% of the first down-leg. This extension is more typical of third-wave activity than a C-wave bottom. In plain English, the longer down-leg suggests falling demand at lower prices, making the summer low less likely to mark the bottom of the long downtrend.

Finally, let's zoom into the daily chart and see if eBay is setting up short-term opportunities on either side of the market. Notice how the stock has pressed above the 200-day moving average and dropped into a trading range. This is a bullish pattern because it's sitting on top of the average, not below it.

Reward potential is the larger issue here. The stock has mounted key resistance, but it's getting close to a secondary high printed in late May at $34.61. A spike into this level could mark the final burst before the stock pulls back to retest new support above $28. This makes sense, given that the uptrend shows few pullbacks since mid-September.

However, a rally into the May high would be beneficial for the stock's longer-term outlook. That move would complete a bullish

first rise

pattern, which signifies the initial 100% retracement of a major selloff. This mathematical alignment is often seen in the early stages of basing patterns that eventually turn into significant bottoms.

In conclusion, the stock's opportunity cost doesn't look favorable for traders, investors or short-sellers at the moment. But that could change significantly as we move into the first months of 2007.

At the time of publication, Farley had no positions in any of the stocks mentioned in this column, although holdings can change at any time.

Alan Farley is a professional trader and author of

The Master Swing Trader

. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;

click here

to send him an email.

Also,

click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.