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AOL poised to retake $50 level
Analysts embrace shares of the new entity
By Tomi Kilgore, CBS.MarketWatch.com
Last Update: 2:44 AM ET Jan 15, 2001
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NEW YORK (CBS.MW) -- Investors knocked the shares of America
Online down Friday after the U.S. Federal Communications Commission
approved the company's merger with Time Warner, but some short-term
technical indicators gave bulls reason for hope.
Since the merger was first announced about a year ago, AOL stock had
lost about a third of its value. That decline, however, appears to be more
a function of general market skittishness rather than investor distaste for
the move: the Goldman Sach's Internet Index ($GIN: news, msgs) has lost
more than 70 percent during the same period.
Now, after a yearlong wait (See full story),
shares of the new entity - AOL Time Warner
(AOL: news, msgs) - look poised to extend
recent gains.
Analyst Jamie Kiggen at CS First Boston told
clients in a research note that "the stock should
trend up in the near-term as the regulatory overhang" and the uncertainty
over timing of the approval is lifted.
Richard Suttmeier, Chief Market Strategist at Joseph Stevens & Co. said
prior to the FCC OK that a weekly close above $43 would target $52.
And Pat Fitzgerald, Senior Technical Analyst at Thomson IFR, is another
person that sees near-term upside potential in the shares. His reason is
twofold.
A break of a trend is AOL's friend
For one, AOL stock has broken its recent pattern of descending highs.
One of the wisest Wall Street clichés is: "the trend
is your friend." If your friend deserts you, watch
out. Take a ruler, line up the intraday highs of
Nov. 8 ($58.50) and Dec. 14 ($50.87), and
draw. If you extrapolate the slope of this descent,
Jan. 11's point on the "trendline" was $45.38.
AOL deserted its "friend" that day, closing up
$2.36 at $47.25.
Typically, a trend will try to reassert itself soon after it is broken. Friday's
point on the line was approximately $45.07; AOL hit an intraday low of
$45.13 before closing down 76 cents at $46.47.
AOL's swings above its pivot point
Fitzgerald also pointed out that the stock was above its "swing" level, a
"moving-average" indicator he uses to see which direction short-term
momentum was pointing.
Market technicians use moving averages, the average close of a traded
instrument over a specified period, to help smooth out the day-to-day
swings. In this case, Fitzgerald uses a three-day moving average of AOL's
"pivot" point. He figures out the "pivot" point by adding up the stock's
open, high and low for a particular day and dividing by three. On Jan. 11,
when the stock broke above the trendline, the swing level was at
approximately $41.90.
Fitzgerald feels these positive signals give reason
to believe the stock would trade up to an initial
resistance level around $50. On Friday, the shares
reached an intraday high of $48.80 before pulling
back. Hindering the stock's progress past that
level is the Dec. 14 high.
A look into the past
A lot of technical analysis is based on the premise that winners and losers
of market battles have long memories. It wasn't that long ago when bears
won a battle that day. Their success -- which eventually took the stock to
a new 52-week low of $31.50 on Jan. 3 -- may give them confidence to
defend that area once again.
Also, notes Fitzgerald, the stock's 20-week moving average, came in just
below that area.
If bulls are able to hurdle the first barrier, they
will undoubtedly line up $58.50 in their
crosshairs. That's the Nov. 8 high mentioned
above. The next level in their sights would be
$62-$63, roughly corresponding to the
intraday highs on Oct. 5 ($62.27) and July 17
($63.25).
And don't forget, the stock made a high of $74.63 on Mar. 27. That was
basically the last time the shares hit pre-merger levels.
Jan. 4 'gap' lends support
Now just suppose the overall market takes a turn for the worse and drags
AOL along with it, like it did throughout last year. Bulls can take solace
from support created by trading "gap" created by the rally on Jan. 4
Helped by the interest rate cut by the Federal
Reserve, AOL closed up 17 percent at
$37.50 on Jan. 3. What's significant about the
next day's 12-percent rally was that its
intraday low ($38.53) was above the previous
day's intraday high ($38), creating a "gap" in
the stock's chart. Upside gaps tend to support
a stock, since sellers ahead of them left stunned by the following surge
would likely be happy to break even when given a second chance.
If that area is surpassed, look for the 52-week low ($31.50) to be
revisited.
If you want to take it a step further, there was an upside gap back in late
December 1998 that has yet to be revisited. The stock reached a high of
$26.25 during the week ended Dec. 12. The following week's low was
$27.06.
Before you start taking out the almanac to find the next support area,
remember not to fight the Wall Street herd, which looks ready to embrace
the new AOL. |
