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Looking At A Dog

03/05/13 02:08:07 PM
by Koos van der Merwe

When a share is newly listed on the market and then drops 80% plus, do you look at it for a future buy?

Security:   ZNGA
Position:   Accumulate

Zynga (ZNGA) is a share that was listed on the market on December 16, 2011 with the rumor that Facebook (FB) would buy the company, because FB offered its games to be played on Zynga's website. The rumor however proved false.

Figure 1: Weekly chart of Zynga.
Graphic provided by: AdvancedGET.
The weekly chart in Figure 1 of ZNGA shows how the share price initially fell from its listing price of $11.00 on December 16, 2011 to a low of $7.97 by January 13, 2012, probably as the 'newly created millionaires' sold shares to better their living standards. The share price then rose on the FB purchase rumor to $15.91 by March 2, 2012 and promptly fell to a low of $2.09 by November 9, 2012 as the rumor proved false. The company was one that grew too fast and was forced to bring its house in order. The share price started rising as speculators received a stochastic buy on November 23, 2012 on the hope that the share was oversold and could recover somewhat. Then came the rumor that the company would moving into gambling games. Is this the positive news speculators have been waiting for?

Figure 2: Daily chart of Zynga
Graphic provided by: AdvancedGET.
The daily chart in Figure 2 shows how the price fell strongly on a gap eventually bottoming at $2.09 on November 13, 2012. The chart shows that a cup-with-handle pattern has formed as price rose to fill the gap. With the handle at $3.76, a buy signal will be indicated should price move above this level. The JM internal band indicator did give a buy signal on February 22, 2013 on a gap. The JM internal band indicator is a 15-period simple moving average offset by 2% positive and 2% negative. Note that as the share price rose, volume rose: a positive sign. As the price fell, volume fell: another positive sign. However, the RSI gave a sell signal on February 11, 2013 which is reason for concern.
If you had bought the stock at the first RSI buy signal on August 13, 2012, you would have been taken out with a stop signal soon after. You would have then bought the stock on the RSI buy of October 24, 2012 because it looks like a divergence buy signal, where the RSI signal rises as the stock price drops lower. This buy would have been successful. Investors, however, would have waited for the handle at $3.76 to break out of the cup-with-handle formation.

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.

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