Monday, July 2, 2012

Research in Motion (RIMM) hints at a short squeeze; Netflix (NFLX) poised to rally

After the strong rally on Friday, many hourly and five-minute charts are showing securities in breakout mode. Netflix and Research in Motion, in contrast, seem just on the verge of rallies (very cautiously so in the case of RIMM).

Overall markets closed relatively flat today (Monday, July 2). The S&P500 gained 0.3%, while the NASDAQ and DJIA had change of +0.6% and -0.1%, respectively. A notable engine of the NASDAQ’s outperformance today was – surprise, surprise – Apple (+1.5%).

Research in Motion is a story of blood in the streets. The stock closed today at $7.49, a trifle of a price compared to the 52-week high of $33.54 and 2-year high of about $70. Unfortunately for longs, the brutality of RIMM’s decline is matched by the startling deterioration of the company’s prospects. Indeed, the stock gapped down about 15% just this past Friday on the publication of its latest earnings release.

The two-day chart of RIMM cautiously suggests opportunity on the long side, however. The 11:00am hour today (Central) saw a sharp rally, a short squeeze that’s quite common among stocks with high short interest (presumably the case for RIMM, given its long and steady decline).  The afternoon then saw consolidation at the upper end of the day’s price range and a break through a downward-sloping price channel (shown in green below).

RIMM, 2 d 1m
To be clear, the price action in RIMM does not scream ‘buy!’. A break of the morning high of $7.57 and penetration of the yellow price channel (which encapsulates all of the past two sessions’ data, unlike the green channel) would have made a stronger bullish case.

Netflix, like RIMM, is a badly beaten down security. Unlike its Canadian neighbor, however, Netflix has been consolidating since late April in a downward-sloping price channel of relatively modest slope, not aggressively plumbing spectacular new depths.

NFLX, 90 d 1h (zoomed in)
More bullishly still, NFLX actually broke through its 2.5-month channel on Friday and managed to stay above it today (despite registering a 0.9% decline on the day). The channel is colored red in the above screenshot. Any advance over $68.9, the intraday high of today and Friday, would further fuel the bulls.

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