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Technology Stocks : America On-Line: will it survive ...? -- Ignore unavailable to you. Want to Upgrade?

To: White Shoes who wrote (6651)	1/2/1998 12:27:00 AM
From: WBendus	Read Replies (1) \| Respond to of 13594

It is no mystery that I do not hold a very favorable opinion about the stock of AOL and I have come up with about 21 different reasons why I think AOL's stock is headed for the dumper. For the next few days I will gladly share about one to three of my thoughts per day on why I think this is the case. Tonights post will focus on one, my predictions on why January could be a rough month for AOL and two, how the short term technicals of the stock action can support this hypothesis. Those people that have held this stock through the past year have seen an enormous gain in the value of those shares and momentum investing has been the key contributor to those gains. AOL, as an internet play , has not been the only stock to appreciate. The support for this group has also been seen in the shares of MSFT, XCIT, YHOO and others. Since AOL, XCIT and YHOO have all seen their share prices go up in excess of 200% during the past year, it is only logical to expect that people would most likely not want to take those gains in December so as to have to pay extraordinary taxes on their winnings. But, since AOL has been such an attraction for short players and they have lost considerably, it would make sense that the stock could run up as shorts seek to take losses for tax purposes. Therefore, just as there is likely to be a positive January effect for those companies that have been sold by longs for tax purposes, it is likely that AOL could see a similar but opposite in effect in its stock price as shorts seek to re-establish their short position. This could also be exacerbated by longs seeking to capture their gains now that they will be able to push the tax consequence off until April of 1999. Support for this hypothesis can be seen in the technical indicators plotted against the recent price action of the stock. One of the most effective ways to use technical indicators is to look for areas of divergence --areas where the stock price and an underlying indicator do not seem to be telling the same story. Many common technical indicators are providing this very divergence which can be construed to be a negative for the near term action of the stock. In order to varify my findings, try this link cbs.marketwatch.com It will allow you to plot all of the indicators that I am speaking about in the following paragraphs. One common techinical indicator for supporting the price action of a stock is the ADI (Accumulation/Distribution Indes). In a nut shell, the ADI is an indator that measures a stocks daily action in terms of its high, low, close and volume. As stock prices go up or down, so too should the ADI. This has not been the case at all for AOL over the short term or even more troubling, the long term. Another helpful tool in locating areas of divergence, altough considered a better indicator of overbought and oversold conditions, is the Stochastics Indicator. This study seeks to identify whether a stocks closing price is gravitating towards the high of the day (for stocks going up) or the low of the day (for stocks going down) and it is composed of two lines, a fast and the exponentially smothed value of that fast line. Stochastics will tend to "peg-out" at the extremes as a stock enters into a trend and this has not been the case for the indicator ploted against AOL. The indicator can also be used to measure for divergences, and in the most recent periods for AOL, the indicator has been diverging to the downside. On-Balance-Volume and Money Flow and Moving Average Convegence/Divergence indicators have also been producing similar results. Volume has also shriveled up during the month of December and I think that it has shrived more so than can be explained by seasonally weak trading. This would indicate to me that new longs are not entering because of the excessive price, existing longs are not selling for the reasons noted above and that the shorts have been slowing trying to regain themselves, all adding up to slow trading activity most likely influenced by day traders rather than any real committed money. Considering that the fundamental tax reasons are ripe for selling, the trading activity has slowed even while the price has risen (considered to be a weak combination) and the failed confirmation by technical indicators, I think that there is considerable reason to be concerned about future price increases during the month of Januar. Wayde.