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A Second Look at the AOL Chart Proves Profitable

Also, thoughts on Amazon.bomb and reader requests.

I hate to bring it up yet again, but this darn

America Online

(AOL)

is a living classroom. Therefore, at the risk of being redundant, I wanted to revisit Case & Co. and show you the value of looking at charts in two different time frames.

First, the background. Throughout the Memorial Day weekend, I was getting an uneasy feeling (again!) about the tech stocks. Given that, I wrote down a few I wanted to focus on, emphasizing, of course, the short side. Specifically, I put in my journal, "AOL -- short on the breakdown."

That was the easy part, though. The tough part was finding the best entry, and that's what I was looking for last Tuesday morning.

Lately, I've had a fair amount of success entering intraday with the tech stocks, and I knew that's the approach I wanted to take with AOL. Yes, with these stocks there is very good chance you'll enter, only to be stopped out immediately. So, your win rate is low. But, if you place your stop correctly, your risk is low as well, while your potential gain can be quite high.

Therefore, if you're going to enter intraday, you need to look at real-time tick or minute charts to gauge the action. What's convenient, however, is that I look for the same patterns on an intraday chart as I do on a daily chart. In essence, breakdowns from support. The only difference? Since I'm shorting real time, I have to ignore my volume requirement.

In order to use intraday charts effectively, though, it helps to have them verified with daily charts, and here's where everything came together for AOL. It never hurts to redraw your support or trendlines, and in fact, I do this regularly for trades I considered, passed on, but decided to take a few days later. Simply put, more data often reveals a clearer chart.

With AOL, then, it was clear the support line was now at 115. Why 115? Because that was the line that touched the most points

and

it was a whole number. The latter is especially important because whole numbers often provide strong areas of support or resistance. Given that, I figured if AOL traded below 115, it was pretty much broken. Therefore, even without looking at the intraday chart, I wanted 114 7/8 as my sell stop.

That Tuesday morning, I put AOL on my quote screen and every few minutes watched the intraday action. They don't often work out like this, but AOL was perfect: The daily chart said support at 115, and sure enough on a 15-minute chart, that same support was clear as day.

The only thing left to do was put in a sell stop at 114 7/8, matching up exactly with my thoughts from the daily chart. Sure enough, at about 1:40 PM, my alert went off that AOL had finally traded at 114 7/8, and I was filled a few minutes later at 114 5/8.

The next step was to set an appropriate buy to cover stop. What you don't want to do is dally around, waiting for AOL to make a move. If you do that, what generally happens is the stock boomerangs, and shoots back up over 115, with you left standing there. Then you're paralyzed, not wanting to say you were immediately wrong, but left hanging there with a loss. A loss that invariably gets worse the longer you wait.

So, my method is very similar to Nick Darvas': I want to cover just a "tick" above resistance. He never traded Internet stocks, however, so I decided to give AOL just a bit more room and put the stop in at 115 3/4, just above the closest intraday congestion. Not too bad, though: My risk was only 1 1/8 points.

As for my target, well, AOL could drop a long way. Using a rule of thumb, stocks normally drop by the "depth" of the left side of their triangle. In this case, the left side of AOL's triangle is nearly 50 points, meaning the stock could easily go to 65. Now, I'm not sure I'd ever be able to hold on for a 50-point gain, but it's nice knowing my reward/risk ratio is 65:1! So, I guess you have to say the AOL saga continues. No doubt, an update next week!

Amazon.bomb

Forget the actual piece in

Barrons

, because who knows if it's on target or not. No, the real gem is that headline. Now

that

was masterful writing!

But writing aside, what does the chart say? Well, since

Barrons

appeals more to the long-term investor than short-term trader, looking at a weekly chart is the appropriate way to figure out

Amazon.com's

(AMZN) - Get Amazon.com, Inc. Report

TheStreet Recommends

future.

Now if you entered anytime in April, and judging by the volume, many folks did, you've seen nearly a 50% collapse in the stock. So the worse is over, right?

Uh, probably not. At the very minimum, the odds favor a further pullback. Why? Only because stocks tend to move back to their long-term trend line, especially when their growth as been so enormous. Case in point, is the mighty

Dell

(DELL) - Get Dell Technologies Inc Class C Report

. Sharp growth, but once that weekly trendline is established, it acts like a magnet, pulling Dell back.

That's why when I look at AMZN, I think, "Gosh, this stock could fall yet another 25 points, and still be in an uptrend!"

But, if you've lived with the stock this long, you're probably used to a little volatility. Another 25 points down? Ah, just a rounding error. And after that? Guess we'll have to see what else

Barrons

can throw at Bezos' Boys.

Reader Requests

I was shocked. Shocked! (that's my

Herb Greenberg

imitation) to find some reader requests for stocks that actually made money. I mean, really, how quaint.

Nevertheless, I struggled on, with the first request from reader

Ben Tanen

, who wanted to know my views of

Pfizer

(PFE) - Get Pfizer Inc. Report

. One thought: Maybe it stuck a dot-com behind its name when no one was looking!

Finally, Michael Busch wanted a peak at

MCI WorldCom

(WCOM)

. Now, if they had been thinking ahead, it would have been W.COM! (I know, sometimes I am

so

sharp.)

Well, there you have it. Another masterpiece suitable for framing. Or, you know, bird cage lining. More good stuff tomorrow!

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for TheStreet.com each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide investment advice or recommendations, he welcomes your feedback at

gbsmith@ibm.net.