By Serge Berger on June 10, 2013
Atlanta, Ga.-based EarthLink (NASDAQ: ELNK) provides IT, network and communication services to individuals and corporations. Once an Internet giant back in the boom years of the dot-com bubble, the stock began its descent in 1999, and has traded at significantly lower prices since then, albeit in a wide trading range.
Since developing a higher low in late May versus the April low, the stock has behaved well technically. From there, ELNK marked two notably strong hammer candlesticks last week, and appears to be coiling up at a clearly visible resistance zone near $6. A push past there could quickly accelerate the stock higher.
As the Internet has evolved, or more accurately, has been revolutionized, in the past decade and a half, we have seen many high-profile Internet firms go the way of the buffalo. (The sock puppet from Pets.com always comes to mind.)
Some dot-com darlings, like EarthLink, managed to stay in the game by adapting and evolving. While the company likely has a fraction of the following it once had just before the turn of the century, the stock, at least from a trading point of view, should not be dismissed. In fact, it still trades an average of around 800,000 shares a day, which may pale in comparison to the average 2 million shares a day it saw in the late 1990s, but is respectable nonetheless.
This brings me to the long-term charts of EarthLink stock.
For historical perspective, first note the 15-year chart and the steep drop-off in the stock as the early Internet go-go days came to an end at the beginning of the 21st century.
More relevant to the current setup that I am noting in EarthLink stock is the chart dating back to 2005. By connecting a line from the highs in January 2006 through the lower highs in the ensuing years, we arrive at a noteworthy longer-term reference point near the $7.90 area. If and when ELNK manages to push toward this level, the long-term chart may offer a breakout opportunity.
More importantly right now, however, is the lower trendline near $6, which served as support since 2006, but due to a drop below it in March 2013, now is resistance until it is broken.
On the daily chart below, the near-term importance of the $6 level becomes more apparent. A daily close above it should allow the stock to push nicely higher.
ELNK has been coiling up and consolidating since the beginning of May. Intraday selling attempts on Wednesday and Thursday both resulted in the bulls winning out and the formation of two bullish hammer candles with long tails below their small bodies.
In full disclosure, this trade setup is a big exception for me, as I usually don't trade stocks below the $12-$15 range. However, given the respectable volume in the stock, coupled with the technical picture, the setup looks too juicy to pass up.
Recommended Trade Setup:
-- Buy ELNK at the market price
-- Set stop-loss at $5.80
-- Set initial price target at $6.50 for a potential 4% gain in 2-4 weeks
-- Set stop-loss at $5.80
-- Set initial price target at $6.50 for a potential 4% gain in 2-4 weeks
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