Barnes & Noble A Stock To Watch?

02/12/09 09:31:54 AM

by Koos van der Merwe

The yearly book show in Toronto has been canceled because publishers feel that not enough books are being bought by the public. If that's the case, why is the future bright for this bookseller?

Security: BKS
Position: Buy

Ebooks are starting to hurt the sale of books. Amazon's Kindle and the Sony eReader are starting to hurt print book sales with "Buy now to receive 100 free titles" offers, as well as their ability to hold as many as 1,500 titles in a single device, a battery life up to two weeks, and the ability to read books aloud — a must for long car journeys.

FIGURE 1: BKS, MONTHLY

Graphic provided by: AdvancedGET.

So why is Barnes & Noble stock (BKS) giving a buy signal after a fall from $48.64 in March 2006 to its present price of $16.97? A look at the monthly chart in Figure 1 shows a cycle that suggests a bottom is forming, and that the future trend should now be up to the upper trendline. The chart shows that the price does tend to trade within a trading channel of $12 to $50, and that the price is currently at the lower end of that channel and could be at the start of a move toward the upper trendline, although the cycle does suggest that a bottom should form only in August of this year. The relative strength index (RSI), on the other hand, is giving a buy signal, suggesting that we could start accumulating the stock at present levels.

FIGURE 2: BKS, DAILY

Graphic provided by: AdvancedGET.

The daily chart (Figure 2) shows that an inverted head & shoulders pattern had developed, suggesting a target of $26.14 (18.47 - 10.80 = 7.67 + 18.47 = 26.14). The price broke above the neckline, suggesting a buy. It rose to a high of $20.21 by January 9, 2009, and then fell in a downtrend channel to its support line at $15.22. From that level it rose to break out of the downtrend channel, suggesting another buy signal. The RSI is still rising, confirming strength.

Why Barnes & Noble should be a stock to buy in the present market is something the fundamentalists could try to puzzle out, but technicals are suggesting "It is not to reason why, it is just to do or die." (And of course, the works of Rudyard Kipling, whom I'm quoting, are available at your nearest bookstore.)

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.