Is Netease (NTES) starting the next leg higher? Here’s my take. (February 22, 2017)
NTESI want to look at NetEase ( NASDAQ:NTES ). I covered this on the Weekend Update, where we talked about how to buy this stock even though it was up as much as it was on this gap. I will just kind of summarize: If a stock gaps up like this and it doesn’t come back down, there is a reason why it is not coming back down, actually two different reasons:
1. Folks that own the stock are not interested in selling yet. They still think that they are going to get more out of it.
2. Folks that don’t own the stock are saying, “You know what? I got to get me some stock, I don’t think this thing is coming back.” And so that ultimately pushes the stock higher.
Okay, so you are in the stock and then the stock is drifting sideways. Lets say you are not in the stock. What are you going to do? Well not much, because the stock has just been trading in this sideways range. You can see yesterday, very, very tight squeeze towards the end of the day; but that doesn’t really help you out, it just traded flat all day. But then this morning, first thing the stock starts moving higher out of this volatility squeeze. Look how tight these Bollinger Bands are. Now, 300.00 is still resistance; 300.00 is where the stock went to last week and then paused. But if you are an active trader and you are looking at this, this is going to get your attention and you may just decide to take some shares.
The stock keeps moving higher though, note it hits 300.00, that is it, and then backs off. Okay, now we are in the Army. Now the stock is above 300.00. This tells you that this entire sideways consolidation, where so many folks are waiting for a pullback, is not happening, the stock is moving to a new high. So this is actually a buy signal for AGGRESSIVE buyers. A stock that is up as much as NetEase ( NASDAQ:NTES ), you have got to be an aggressive trader. I am not talking about aggressive buyer, load the boat. I am saying, if you are interested in fast moving stuff and you have time to WATCH, just know that there is certainly a chance of reversal on a stock that does this. But once it starts moving above 300.00 it tells you that all the supply that knocked this down, all the supply that kept this stock down for these last several days, well suddenly all that supply is now gone and what we have instead is demand, and that starts pushing this stock higher. And so when you see this kind of move just understand that it is a buying opportunity. This shows you that, again, we just look at it on the daily chart, it shows you that the stock is ready to move higher. So pick a price target.
As we look at the weekly chart you can see zigzag, zigzag, it is really pretty over extended. But if we look at this as a real classic breakout, from bottom to top here it is about 60 points, but lets back it off and say it is 50. So we add 50 points to this (I am looking at the left side of my screen, in the box there), we get about 318.00, I am going to round up and say 320.00. So my target on this trade, when I am trying to determine what my risk/reward is, I am looking for a move to 320.00. Not a huge move, and I don’t trade options on this, not a huge move on this but it is enough. So I am looking for about $15.00 of upside. My stop, back down $1.00 or $2.00 below 300.00. Because the whole reason I am buying this stock is because I believe that supply here left the building. Demand is pushing the stock higher.
If my interpretation is correct then the stock is going to keep going and it is not going to move down. If, on the other hand, my interpretation is wrong, and don’t think about it as being wrong, think about it as, I have a theory, I think this is what it is but that my in fact not be the case. So don’t think about it as being wrong. Just think about the fact that your thesis, there is always another side to it and the other side came true. If I am wrong then the stock is going to go back below 300.00. I don’t have to wait for the stinking thing to go below 270.00. It is an aggressive buy, I have got a tight stop on it, a little bit below 300.00. I might get stopped out, I might not. And by the way, tomorrow, if the stock starts trading above 310.00, maybe even 309.00, what do you think I am going to do? I am going to be adding to that position because I am right. If on the other hand it falls below, I am not going to be adding. I am not going to be averaging down. I am just going to be selling and take my lumps.
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