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is a true child of the dot-com era. The Internet facilitator came public in November 1999 near $190, just four months before the tech bubble broke, triggering a historic bear market decline. This classic cult favorite still had time to double in price before that liquidity-fueled market fell off a cliff, hitting $345 on the first trading day of 2000.
Old-timers might recall this was just five days after PaineWebber equities analyst Walter Piecyk published his infamous $1,000 price target on
. Flash forward 10 years, and you'll notice a major difference between these two tech stocks. In a word, no one wants to own Qualcomm while just about everyone wants to own Akamai.
It's a major accomplishment for this issue to be trading at a three-year high in the middle of a major correction that has dropped most of the tech universe to considerably lower prices. This resilience reflects intense interest in the company at a time that speculative fervor for equities has dropped through the floor.
However, it's still foolish to assume this tech juggernaut will ever return to the glory days of 2000, when the Nasdaq 100 index was trading over 5000. But that shouldn't stop active investors who are still on the sidelines from taking a closer look at this market leader and seeing if it deserves a place their long-term portfolios.
What about short-term trading opportunities with Akamai? Is there upside or downside in this issue as we head into the historically tumultuous months of September and October? And, if you're already holding the stock, it is time to book a few profits? Or should you add more risk to a small position?
As I noted above, the company began its public career in late 1999 when the tech sector was red-hot. It doubled in price quickly, hitting a major high that hasn't been approached in the last 10 years. The stock entered a swift decline in March 2000, dropping price all the way to $0.56 by the end of the bear market in October 2002.
Akamai rose from its near-death experience in a five-wave rally (red lines) that topped out at $18.47 in the middle of 2004. It then eased into a consolidation pattern that lasted into late 2005, when it finally broke out to a new high (green line) and resumed its uptrend. The next rally wave was spectacular, with price tripling into the February 2007 top at $59.69.
That level still marks the high-water mark for this issue more than three years later. The credit-fueled bear market did major damage, although it's tough to see on this logarithmic chart, with price dropping briefly into single digits in late 2008, when it finally bottomed out. The subsequent recovery has unfolded in a "V"-shaped uptick that's now landed price about 12 points under the 2007 high.
Let's take a look at three-year chart in greater detail. The upside accelerated in March 2010 after the stock cleared the 38% retracement (red circle) of the bear-market decline, with volatility then increasing sharply once it hit the 62% retracement (green circle). The rally has now reached within $0.50 of the 78.6% retracement (blue circle).
This is a classic inflection point following a steep slide, so the current trading range might continue and carve out a broader consolidation pattern as we head into the middle of September. That said, there's nothing on this bullish-looking weekly chart to indicate that the 21-month rally is nearing its end.
Current positioning might also set up a profitable trading opportunity between now and October. A market that breaks resistance at the 78.6% retracement level often "goes vertical," spiking into the 100% retracement in a parabolic wave that completes a strong uptrend or downtrend. This raises the possibility of a fast and furious 12-point rally.
This year's price action shows a strong rally off the January low, followed by a period of intense volatility after the stock hit a high near $47 in June. Note the major July selloff that triggered in reaction to the second-quarter earnings release. This dip traced out a classic breakdown gap, cutting through the 50-day moving average and setting up ideal conditions for a sustained downtrend.
Instead, the decline ended just two days later, with short-sellers providing the fuel for a persistent recovery that filled the gap on Aug. 10 and broke out over a two-month trend line just six days later. However, rally momentum has failed to develop since that time, allowing gravity to return and knock price into a sideways pattern between $44 and $48.
Accumulation has taken a minor hit in the last few weeks, as traders have second thoughts about their positions. This might be end-of-summer noise that means nothing, or it could be the start of a failure swing back through the trend line. If gravity takes control, the decline could drop price on top of the 50-day moving average, currently near $43. That level might offer a low-risk entry ahead of a rally run into year's end.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
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, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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