YHOO Stock: Don’t Ignore the Signals
Today I chose to focus on Yahoo! Inc. (NASDAQ:YHOO) stock, and for all the right reasons. I am a proponent of using price charts as a tool to analyze the merits of a potential investment. My approach is systematic, in which I look for trading signals to confirm a trend. YHOO stock is a great example to showcase these tools, as many indicators are confirming a trend that is now in play.
I never use just one indicator to indicate a trading bias; I usually need multiple signals to confirm the trend in order to have any confidence in my analysis. The following is an example of many indicators showing and confirming one trading bias.
The following chart illustrates the signals that I use to discern a trend.
Chart courtesy of StockCharts.com
A downtrend had dominated YHOO stock since shares peaked in late 2015. The downtrend line, highlighted in blue, is created connecting the peaks. A downtrend is defined by lower highs and lower lows. It can easily be identified as the price moves from the upper left of the chart to the lower right, in a staircase-like pattern.
The downtrend was confirmed on May 18, 2015, when YHOO stock generated a death cross. A death cross is a bearish signal that is produced when a faster-moving average (50-day moving average) crosses below a slower moving average (200-day moving average). Traders use this signal to confirm that a bear market is on the horizon. Share price proceeded to fall 59% after this signal was generated.
The trend began to turn when YHOO stock broke above the downtrend in March 2016.
This marked the first signal that a trend reversal was at hand.
On April 20, 2016, the same moving averages used to define a death cross executed a golden cross. This signal is the exact opposite of the death cross and confirms a bullish bias.
Two signals now confirm a bullish trend reversal, suggesting a further upside, but that is not where it stops.
The following chart illustrates a trend reversal pattern.
Chart courtesy of StockCharts.com
From September 2015 to February 2016, YHOO stock formed a double bottom. A double bottom is a reversal pattern that appears at the end of trend. It is marked by two consecutive bottoms, separated by a peak. The pattern is confirmed when shares close above the horizontal resistance that is marked by the peak.
Double bottom patterns are also of great benefit because not only do they signal a change in trend, but they also produce a possible price objective when the pattern is confirmed. The price objective of this reversal pattern is approximately $45.00.
We have further confirmation of a double bottom reversal from the on-balance volume (OBV) indicator. This indicator uses volume to compute buying and selling pressure. It is produced by cumulatively adding volume on up days and subtracting volume on down days. The data is then plotted on a chart. This indicator is used as a leading indicator, as well as to confirm the current trend.
In February, YHOO stock went on to make a new low. OBV did not confirm this new low, as the indicator did not make a new low; this is known as a positive divergence. This was the first sign that a trend reversal was in the making. In the same month, OBV made a higher high, which gave warning that the reversal pattern was going to execute.
I have identified four indicators that have suggested and confirmed a bullish bias. If we use the last signal as an entry point, the current return would stand at a positive 12% and has a price objective of $45.00.
The Bottom Line on YHOO Stock
Using a systematic trading system to trade an instrument like YHOO stock works well when multiple indicators are suggesting the same bias. Each and every strategy is different, and the number of signals one uses to confirm a bias is subjective. The key is to understand your risk tolerance and not deviate from the rules set out by the strategy.
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