This consolidation might not be ready for prime time. It’s a double bottom in its 6th week. O’Neil says it needs to be 7 to be valid.
But he also says to be flexible and given that Chinese gamers were perhaps the most potent group in the spring’s uptrend we might look to find a way into a stock that could well have further legs in a continuing market uptrend.
These stocks all have sloppy formations, something we don’t like to see (see SNDA, PWRD, CYOU). The shakeout in them in early July came on new Chinese gaming regulations that are still ill defined. But price in NTES seems to have found its footing.
We were tempted to take early entry yesterday when the stock broke above $35 resistance, but volume was lacking. That’s not the case today as volume is on pace to be comfortably above average.
Using O’Neil’s 13% rule described in our WMS write up yesterday we’ll take a position in the stock here with a stop under $36.10. Alternatively you can wait for price to take out its intraday high using the same stop.
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After advancing better than 16% from its first resistance point this stock has pulled back for three days and today is trying to turn at the 10 MA.
ReplyDeleteThe first touch of the 10 MA is often a good spot to initiate or add to a position in a leading stock.
So far this morning price has undercut yesterday's low but bounced back nicely. You can take entry here with a stop under the lows or wait for the day's high to be taken out, whether that occurs later today or tomorrow.
Today NTES achieved a greater than 20% gain from its break out point 12 sessions ago. O'Neil suggests stocks that make a quick gain of this magnitude should be held for a minimum of eight weeks provided the market remains in an uptrend.
ReplyDeleteEight Week Hold Rule Invalid on NTES
ReplyDeleteWe don’t like to break the rules, but when a company disappoints on earnings and indicates forward estimates are too aggressive it’s time to exit.
Last night, after backing out accounting changes and one time charges, NTES appears to have reported in line EPS on somewhat lighter sales.
A stock in a voracious uptrend can recover from reporting in line EPS provided the YOY gain is strong, which it was for NTES. But slumping sales is an unforgivable red flag.
What’s worse is that NTES will encounter higher costs in launching a widely anticipated new game, but the debut of that game is uncertain because of government antipathy for the sector. Because of this analysts have taken down forward estimates. While they will still be attractive the higher numbers had already been factored in by the market and discounting them could well be a painful process.
Over the last several weeks we’ve seen NTES competitor SNDA, which was a huge gainer off the market’s March lows, completely fall apart. IPO CYOU, another big winner in the space, has also run into problems.
We originally felt that the fates of SNDA and CYOU were simply a sorting out between winners and losers in the space. With NTES’ report and price action this morning we now view their failures as a harbinger of sector rotation out of the space.
NTES is down over 12% as of this writing on what is shaping up to be the highest daily volume in the stock in over two years. We have to violate the rules here and recommend taking profits on this play.