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Yahoo Is Oversold and at Support

10/06/06 11:51:48 AM
by Arthur Hill

Oversold momentum oscillators and firmness at support could foreshadow a bounce in Yahoo!

Security:   YHOO
Position:   Hold

On the price chart, Yahoo! (YHOO) established support at 25 over the last few months. The stock first established support at 25 after a large gap down in July. Despite this huge gap, the stock firmed and bounced back to broken support at 30. However, this first bounce failed and the stock moved sharply lower on 19-Sep. The decline since the 19-Sep freefall has been rather flat and there are signs of firmness around 25. The candlesticks over the last three weeks are relatively small. This created firmness as the bulls and bears battled it out around 25.

In addition to firmness, 14-day RSI became oversold with a move below 30. RSI is a classic momentum oscillator developed by Welles Wilder. The indicator oscillates between 0 and 100 with moves above 70 considered overbought and moves below 30 considered oversold. Notice how the indicator became oversold in July.

Graphic provided by: MetaStock.
 
Oversold is not necessarily bullish. This condition serves as an alert that prices have moved to an extreme and the odds favor a bounce or consolidation. Before banking on a bounce though, we need to see some evidence of strength and at least a minor resistance breakout.

For evidence of strength and a bullish signal, I will turn back to the price chart and use the Stochastic oscillator. On the price chart, I see short-term resistance at 26 from the consolidation over the last 2-3 weeks. A move above 26 would break consolidation resistance and argue for a bounce back towards resistance at 30. The Stochastic Oscillator remains below 20 and oversold. I would stay away as long as it remains below 20. A break above this level would be the first sign of strength in over a month and this would further argue for a move to resistance around 30.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
Company: TDTrader.com
Address: Willem Geetsstraat 17
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Website: www.tdtrader.com
E-mail address: arthurh@tdtrader.com

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Date: 10/06/06Rank: 4Comment: 
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