Net stocks aren't flying very high anymore, but they're still setting up nice swing trades. After getting pummeled for months, many of these stocks are bouncing off multiyear lows. Driven by optimism that things can't get any worse, market players have finally reawakened the Net rally.
But pick your trades wisely. With few exceptions, Net stocks face an extraordinary burden of overhead supply. Vast legions of investors and institutions are still holding these stocks from much higher prices. They will sell out their diminished portfolios for years to come.
Many of these stocks are now trading in the single digits -- a situation that demands careful evaluation of position size and risk tolerance. The good news is the massive liquidity and small spreads of the sector's largest stocks. These high-float issues can trade all day with a single penny marking the difference between the buying and selling price. This small transaction cost has another advantage. We can safely juggle in and out of a position several times to catch the best entry price.
Most Net rallies are only bear-market bounces. This fact raises the odds that resistance at stocks' 200-day moving averages will extinguish their progress. In fact, the king of the jungle we'll look at today should encounter that gorilla very soon.
So play the Net rallies and enjoy the good old days. But keep those stops tight and take what the market gives you. Fortunately, that could be double-digit gains at these discount prices.
got crushed when the bubble burst, losing over 90% of its value. But times may be changing for the online retailer. The last few weeks finally delivered some good news and the stock rallied about 50% off its October low. It now sits just under $10. Not a huge ramp for the former giant, but accumulation suggests a bottom may near. Notice the big move on Nov. 14. It drove Amazon above its 50-day moving average, right into a test of the last high.
While volume shows investor interest, Amazon could be headed into a broader basing pattern instead of a breakout. Notice the lines drawn across recent highs and lows. They take on the appearance of a partially developed symmetrical triangle. A stock needs to eject quickly out of a box like this, or it can easily drop all the way back to the lower trend line.
The volatility zone between $9.50 and $10 raises another caution flag. As you can see, sharp reversals characterize these price levels. Why does this happen? Certain chart points hide significant numbers of traders and investors sitting in losing positions, because they bought into sudden reversals. This volatility needs to be unwound before price can move past it.
The key to this trade is the market number $10. If Amazon can mount it, it will complete two bullish patterns and draw in new buyers. First, it would trigger a cup-and-handle breakout on the shorter-term chart. More importantly, it would confirm a well-formed double bottom on the daily chart.
The best trading plan might be to go long before the breakout. Consider a position using the intraday pattern, but be prepared to exit quickly if larger forces intercede. For example, a break above the small triangle could offer the perfect entry for a larger price move. But avoid any position near the bottom of this pattern. It has the look of a bearish descending triangle. We could see a decent selloff if that lower line breaks.
Concentrate on good trade management if you work this position into a profit. As I mentioned above, strong resistance will stall most bear-market rallies at the 200-day moving average. This formidable barrier is sitting near $12 on Amazon's daily chart. The hot spot also crosses the major down trend line for the entire postbubble collapse. We should take our profits if and when price approaches this danger zone.
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. At the time of publication, Farley held no positions in any of the stocks mentioned in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to
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