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Is eBay a Short Here?

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Expectations for the tech stock are high, and anything that falls short of these expectations could result in a negative reaction from eBay's shareholders.

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Online retailer and auctioning site eBay (NASDAQ:EBAY) has made a nice run over the past year. Per the weekly chart below (all data as of close on June 3), we can see a trending stock that has made a series of higher highs and lower lows. Recently, the stock seems to have begun to "stall" a bit, thus leading me to believe that EBAY may be due for a short-term correction after making a strong, sustained run for quite a while.


Click to enlarge (courtesy of eSignal)

My firm likes to play things from the contrarian side-i.e., we like to fade sentiment when it is overly bullish or overly bearish. Our conviction, when taking the other side, is even stronger when we have a technical backdrop as well as quantitative data to support our thesis. With EBAY, I am seeing a solid bear case. Here's why: First of all, note (on the daily chart) the head-and-shoulders pattern. To some, this may not be easily recognizable due to the "loose and sloppy" nature of the chart. I honestly believe that when it comes to identifying such patterns, it is a completely subjective, rather than objective, matter. Basically, you will see whatever it is that you want to see in a chart. Here, I am seeing signs of EBAY putting in a short-term or intermediate-term top.


Click to enlarge (courtesy of eSignal)

Another reason that leads me to believe EBAY may present a good shorting opportunity relates to option activity. Bullish bets continue to pile in, and this is prevalent based upon the current open interest configuration for the June series. You should take note of the graph below, and how peak call open interest resides at the 55-strike. In the past, I have discussed how overhead calls can act as resistance. As June expiration approaches, we could see an eventual unwinding of these bullish bets, which could then act as a headwind and drive shares of EBAY lower. I like EBAY short, especially if it can stay below the ~$55 level.



Finally, analysts and news outlets seem to love the stock. Per our data, EBAY currently has 24 "buy" ratings and four "holds." Should we see some weak price action from EBAY, this could lead to downgrades, which could spark some selling. Also, if you missed this Fortune cover a few months back, then maybe it's time to bring it to light. The claim that "eBay Is Back!" is a strong statement - I especially like seeing this type of bullish sentiment on an individual equity. My thinking is that when a stock has garnered enough attention to make it on the front of a magazine cover, then it probably already has a lot of positive information priced into it. In other words, expectations are high, and any information that falls short of these expectations could result in a negative reaction from shareholders. Would I ever fade a stock based just upon a magazine cover? No. Do I like seeing this in conjunction with other compelling information? Absolutely.


(Source)

I'm not calling a "definitive" top to the long bull run that EBAY has made. Rather, I am merely looking for signs that the stock is due for a slight pullback/correction. I'd use this information at your own discretion, and remember to go into the trade with a plan. It has been a choppy environment out there, and adhering to your stop/losses is more important than ever now.

Good luck.

This article by Peter Bryans was originally published on Schaeffer's Investment Research.

Below, find some more great content from Schaeffer's Investment Research:


Daily Game Plan – Sellers Back in Control

Chartist Corner: More Concerns for the Bulls

Study of the Week: SPX Up Seven Straight Months. Now What?


Twitter: @schaeffers
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