Everyone is Selling This Stock, but the Charts Say, ‘Buy’

Yahoo (NASDAQ: YHOO) sold off Wednesday after disappointing with its latest earnings report. Despite the miss, however, the stock is well positioned to push higher in coming months.

On Tuesday after the close, the company reported second-quarter earnings per share (EPS) of $ 0.37, which missed expectations by a penny, but were up 5% on a year-over-year basis. The bigger disappointment came on the top line. Revenue for the quarter was $ 1.04 billion, down 3% from the prior-year quarter, and below the estimated $ 1.09 billion.

CEO Marissa Mayer said she was “not satisfied” with the Q2 results. Mayer, who was brought in two years ago to turn the stagnant company around, hasn’t managed to get it growing again, even though shares of YHOO have rallied meaningfully since her arrival.

The single biggest thing Yahoo has going for it is its 23% stake in Chinese e-commerce giant Alibaba. Alibaba is expected to go public in August, and while estimates vary, it could easily be the largest U.S. IPO in history.

On Tuesday, it was announced that the number of shares Yahoo is required to sell was reduced to 140 million from 208 million. This should be bullish for Yahoo, as it will give the company a bigger stake in the future of Alibaba. And the pre- and post-IPO hype should at the very least support YHOO’s price, and very likely drive shares higher over the next two months.

Turning to the charts, we see YHOO has been on a wild ride over the past eight years.

Along with the rest of the stock market, YHOO fell into the abyss in late 2008. Longer-term momentum oscillators like the Relative Strength Index (RSI) were wildly oversold. Then, just as quickly, the stock rebounded as investor sentiment bottomed.

YHOO traded sideways from mid-2009 to mid-2011, when the European debt crisis took the stock down along with the rest of the market. Also like the broader market, YHOO made an important higher low in the second half of 2011.

Finally, in the fall of 2012, the stock kicked off a massive rally, which remains intact to this day — also like the broader market. In other words, the stock’s high degree of correlation with the broader market, as well as the hype from the upcoming Alibaba IPO, support higher prices in the future.

Also note that when YHOO topped in January, it did so at a lateral resistance level that dates back to 2006. The price action thus far in 2014 has mostly been a consolidation of the 2013 rally.

On the daily chart below, the stock’s 50-day, 100-day and 200-day moving averages are trading close together, which is a function of the consolidation phase so far this year.

With YHOO trading in a narrowing range, it will ultimately resolve in one direction. Given the overall bullish construct of the charts, this breakout stands a good chance of being to the upside. To reduce risk, wait for a daily close above $ 36 to buy.

Recommended Trade Setup:

– Buy YHOO on a daily close above $ 36
– Set stop-loss at $ 34.30
– Set initial price target at $ 39 for a potential 8% gain in 6-12 weeks