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BOLLINGER BANDS


The LookSmart Squeeze

01/13/04 01:17:30 PM
by Matt Blackman

During its heyday in March 2000, this stock hit a high of $69.50. By September 2001, it had plummeted to a meager $0.31. Slowly but surely, it has been making a comeback in both price and respectability.

Security:   LOOK
Position:   Accumulate

As Internet search engines mark their tenth birthday, it is interesting to consider how much things have changed. Back in the good old Internet days just four years ago, search engines were flying high. But a number of them are gone and as the rest fight for market share, LookSmart Ltd. (LOOK - Nasdaq) has been slowly but surely gaining respect and profitability.

Since September 2002, quarterly revenues have doubled from $20 to $40 million and earnings, which have stayed in the black, are rising. The modest price/earnings ratio of 4.7 and equally attractive price/book and price/sales of 2.29 and 1.26 respectively, are causing investors and traders to sit up and pay attention again.


Figure 1 Daily chart of LookSmart Ltd. (LOOK) showing Bollinger Bands, Bandwidth, (third window), Intraday Intensity and Accumulation Distribution Indexes (second window) and Relative Strength Index (RSI) in top window. The lower window shows normalized volume to quickly identify points where volume exceeds the 50-day moving average (orange line).
Graphic provided by: MetaStock.
 
John Bollinger describes one way to properly employ his namesake bands in his 2002 publication, Bollinger on Bollinger Bands by combining a price-based indicator like the RSI, with one or two indicators that include volume such as the Intraday Intensity or Accumulation Distribution Index.

One example is what he calls a buying Squeeze where volatility falls to historically low levels, in this case when the bands are at a six-month minimum distance (dark magenta arrow in window two) with positive divergence between the Intraday Intensity and/or Accumulation Distribution Indexes and price. Volume should also be above its 50-day moving average on the breakout. Other confirmation signals could include a trendline or significant resistance level break.

LOOK hit a six-month minimum volatility level on December 26 where it stayed until December 29, 2003 confirming that a Squeeze had occurred accompanied by positive divergence with three indicators. It is also interesting to note that an island reversal looks to be taking place with a minimum target (pre-gap) price of $2.93.

From both a fundamental and technical point, LOOK is worth attention if you are in the market for a volatile inexpensive stock that has limited downside but significant upside potential.




Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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