Systematic Trading with AKAM Stock
Akamai Technologies, Inc. (NASDAQ:AKAM) stock had undergone an extensive sell-off. Beginning in the later part of 2015, over a three-and-a-half-month period, shares fell 47% from peak to trough. If investors examine AKAM stock’s price chart, they’d see that while not all of these losses could have been avoided, some could.
So let’s do just that…
Assuming that these factors are tangible, the trading signals that foresaw weakness in AKAM stock can be used to foresee a change in the trend. If we use these signals to obtain a price objective, we would then have the required ingredient to put together a potentially lucrative trade.
Below we will examine AKAM stock’s chart and outline the signals, which foresaw a decline but are now signaling a bullish reversal.
Chart courtesy of www.StockCharts.com
On October 29, 2015, AKAM stock confirmed a death cross. A death cross is a bearish signal that appears on a stock’s chart when its 50-day moving average crosses below its 200-day moving average. Traders watch for this signal to confirm a bear market is near. In the case of Akamai stock, following this signal, AKAM shares proceeded to fall from $62.50 to a low of $40.00 apiece—a 36% loss.
The good news for investors is that the same moving averages that confirmed the death cross are now converging into a possible golden cross. A golden cross is the exact opposite of a death cross; it confirms a bull market is on the horizon.
The chart pattern setup that I am currently witnessing on AKAM stock’s chart can also be viewed as bullish. Stocks that trend higher have impulse waves, followed by consolidations. The price action off the lows in early February 2016 is an impulse wave and shares are currently trading in a sideways consolidation pattern. These patterns usually play out in the direction in which they came. In this instance, this action is pointing to higher prices ahead for AKAM stock. A close above the stock’s horizontal resistance will confirm this view.
Now that we have determined that AKAM stock may be about to move higher, we need to quantify our possible targets in order to execute a strategy.
There are a few defining patterns and chart structures that can assist investors in determining a possible price objective. Patterns and signals tend to be imbedded with one another and will offer multiple price targets. The following chart helps illustrate this point:
Chart courtesy of www.StockCharts.com
Fibonacci retracement numbers (highlighted in green) are a very popular tool used by many technical traders. This tool is used to identify countertrend price objectives. In theory, when a stock breaks a primary trend, shares will retrace approximately 50%–62% of that trend.
Shares of AKAM stock are entering the 50%–62% box. If I were bearish on AKAM stock, I would assume that shares would stall in this area. Since I am not bearish, my expectations are that AKAM stock shares will trade and close above the area labeled 61.8%, fully retracing the entire drop.
The 61.8% Fibonacci retracement number is also significant, as this is where AKAM stock gapped down after the company guided down earnings.
A gap on a stock chart is created when a stock opens the next day and the price is above or below the close from the prior day. There are many types of gaps, but in this context, we will focus on the price action described as “filling the gap.” This occurs when shares trade back and fill the void that was left when shares gapped. Once a stock starts filling the gap, it will rarely stop in between. This is because there is no resistance within the gap.
Thus, if shares can close above $63.00 apiece on a weekly basis it will confirm that AKAM stock is attempting a gap fill that has a price objective of $75.00. The good news for us is that the consolidation pattern provided us with two targets: $66.00 and $68.00. Both are above $63.00.
If we assume a price objective of $75.00, then the following bull call spread could be used to effectively capture the trade. This strategy involves simultaneously buying calls at one price and selling an equal amount of calls at a higher price. The only risk an investor has is the initial outlay used to put the trade on.
- Buying one February 17, 2017 $62.50 call contract for $4.50
- Then selling one February 17, 2017 $75.00 call for $1.06
The investor’s net outlay here is $3.44 per share. At expiration, if shares are trading above $75.00, the net value of the trade will be $12.50—a potential profit of 263%, less trading fees.
The Bottom Line on AKAM Stock
The technical signals are aligning and present an opportunity to catch AKAM stock as it transitions from bearish to bullish. This kind of strategy is perfect for the investor who seeks to capitalize on the buy-low, sell-high mentality. There are adherent risks in the strategy, but if the price objective is met within the required period, the profits for investors are substantial.
(Keep in mind that this is not a buy recommendation for AKAM stock. Rather, it is meant to be an example of the kind of strategy investors can consider to profit from a stock like Akamai.)