Yahoo Runs Into Historic Overhead Supply

Yahoo has had a parabolic run over the past two years to get back all the way to the early 2006 highs. The problem that I see is that when stocks return to a former level of resistance, especially of this magnitude, more often than not there is some sort of acknowledgement of that supply. Last time Yahoo was up here the stock fell 80%.

The first chart is a weekly bar chart of $YHOO where you can see prices returning back to those previous highs. This sell-off to start the week shouldn't be that surprising:

Short-term I think this $41 level is the key. This was resistance at the beginning of the year and the last thing the bulls want to see is this breakout fail. You know the old saying that, "From Failed Moves Come Fast Moves In The Opposite Direction". As long as prices hold 41, the bulls short-term are still in good shape. But a breakdown below that and look out below.

I think the most constructive chart structurally for $YHOO is the weekly chart relative to the S&P500. After being a serial underperformer since 2006, the relative chart broke out nicely last year and still looks like it's got legs:

We like to incorporate a top/down approach and look at the markets from a structural perspective, and then work our way down to smaller time frames for execution and risk management. We have our levels as I mentioned above. I think there are potential longs as well as shorts setting up in this name. It's important to keep an open mind and not be stubborn.

We only want to own $YHOO above the January highs. But from a risk/reward standpoint, based on the long-term weekly chart running into historic overhead supply, I'm not sure the risk/reward here favors the bulls. I'd keep a close eye on that $41 level to put stop losses and/or initiate shorts in the future.

I'll try my best to update this chart upon further developments.

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Tags: $YHOO $SPY $BABA