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TRADING SYSTEMS


Will Yahoo Break Higher?

10/21/11 09:27:30 AM
by Donald W. Pendergast, Jr.

So is the entire broad market at a cycle high or is it simply regrouping before moving higher? A look at Yahoo's chart might help answer that question.

Security:   YHOO
Position:   N/A

Today's action in the broad market was rather choppy and indecisive: Buy after two weeks of such solid gains, maybe that can be allowed. Technically, a near-term cycle high has been reached, and that's probably the main reason we see some profit-taking going on. However, bullish forces (seasonals, better than expected earnings in some stocks, and so on) are still undergirding this new uptrend, so it might pay to keep tabs on some of the better-known large caps that are now issuing buy signals. Few stocks are better known than Yahoo (YHOO), and that's where we'll spend some time looking at its daily chart setup.

FIGURE 1: YAHOO, DAILY. Waiting for the break of $16.79 might seem hard to do instead of initiating a long position now, but it's usually best to enter an RMO long setup on a buy-stop above the high of the trigger bar.
Graphic provided by: MetaStock.
Graphic provided by: RMO indicators and tools from MetaStock 11.
 
On Yahoo's daily chart (Figure 1), we see a reasonably consistent pattern of higher highs and higher lows, along with positive medium-term money flow (bottom of the chart; histogram based on the 34-period Chaikin money flow indicator (CMF)(34)). That's bullish enough as far as a positive technical framework goes, but the real item of interest now is the new Rahul Mohindar oscillator (RMO) swing buy signal on October 19, 2011.

Normally, traders should only take a long entry on a RMO buy signal when the high of the trigger/setup bar is exceeded (using a buy-stop market order in most cases), so prices will still need to rise 85 cents before that can happen. Tuesday's wide-range trigger bar is also troublesome in that prices closed in the lower third of its daily range -- a close that was also lower than the day's opening price.

As mentioned before, there has been some profit-taking going on, what with traders worried that their recent open position gains might be wiped out on a piece of bad news from Europe. However, if enough new buying power comes in to take out that high of $16.79, that could be a trigger that sets off a wave of buying all across the entire .SPX, .NDX, and even .RUT complexes. Yahoo is certainly thought of as a bellwether issue, so ignore a triggered long setup in this stock at your own peril, especially with the year-end seasonal bug starting to beckon to traders hopeful that the stock market will deliver them some long-awaited good news in their monthly account statements.

Running a two- to three-bar trailing stop of the daily lows is a very simple and effective way to manage your triggered YHOO trade (should it happen, of course), and if you go the covered-call route instead, then the use of a 21-period exponential moving average (EMA) might also be a very simple and workable way to manage a near-term buy-write position. It's your choice; just make sure you use modest position sizing, regardless which way you go.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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