I’m going to paint a word picture for you.
Suppose you own a stock that gave three successive buy signals last summer — in 2007. The stock ran from $28 per share up to $34 a share. Sounds good so far, right?
But the stock then broke through the support line, was already on a relative strength sell signal, and the sector has been out of favor for a while. Not so hot now, eh?
The stock then treads water in January and February of 2008 around the $20 mark. Out of the blue, a competitor offers to negotiate to buy the company and the stock dances from $21 all the way up to $30. However, $30 happens to be precisely where it meets the overhead resistance line and the stock stalls right at $30.
For nearly 6 months these two companies have had on and off negotiations. Sometimes it looks like a deal will get done, other times it looks like they are the Hatfields and the McCoys.
At the moment it looks like (according to the media), some sort of deal might get done.
But the charts are telling us something completely different.
The stock has now given us a bearish catapult — a triple bottom followed by another double bottom. Many times this indicates the stock may trade even lower than the current share price. Indeed, the stock now sits at yet another double bottom and is close to giving the third sell signal.
So while the media is hailing Jerry Yang (the CEO of Yahoo!), as a hero, the shareholders are saying otherwise. They are voting with their feet and exiting the stock.
Supply is clearly in control of this story. And whenever there is too much supply, prices must fall.
Don’t ever forget that.