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WALL STREET, CALIFORNIA | Street Strategies

For Truly Gutsy Traders: Tips on Playing Net Issues

September 29, 1998|WALTER HAMILTON

Five weeks ago, Amazon.com's stock traded near $135. Two weeks ago, it was $73. Today, it's almost $116.

Talk about volatility; that's volatility on steroids. And Amazon.com isn't alone. In a stock market that itself is fluctuating widely, the volatility of many Internet-related stocks makes everything else look mild in comparison.

That means the hordes of individual investors who have been trading Internet stocks are taking on lots of risk. But the volatility also means that small investors can turn impressive profits--if they know what they're doing.

"Is there money to be made in some of these things?" asked Elaine Yager, technical analyst at brokerage Herzog, Heine, Geduld. "Sure there is. It depends on what [level of risk] you can stand."

After falling hard in late August, Internet shares have staged a rousing recovery that has brought many of the major stocks within striking distance of their all-time highs.

Certainly, some investors are buying and holding these issues for the long term. But with few of the firms profitable as yet, the stocks' swings have as much to do with raw emotion as with fundamentals.

What's more, trading patterns, and anecdotal evidence from many online brokerages, show that the moves in these stocks often are fueled not by institutional investors but by small investors who dash in and out of them--sometimes within the same day.

Their goal is to catch often brief but immensely powerful moves. For example, in just a three-day period last week, Yahoo (ticker symbol: YHOO) leaped $27, or more than 30%.

To some, in fact, Internet stocks' volatility makes them perfect for trading rather than investing.

For the stock market overall, "the circumstances are ripe for a wide-ranging, spastic market," said Gregory Nie, a technical analyst at Everen Securities. "Volatility will stay on the high side, and very aggressive traders try to take advantage of volatility."

Of course, rapid-fire trading flouts just about every long-accepted rule of investing, which hold that individual investors should do thorough research and invest for the long run.

But that being said, there's no question that many small investors are trading Internet stocks in hopes of a fast buck. And for those who insist on doing so, several technical analysis strategies can help.

These strategies--such as recognizing "breakouts" in stock prices as well as "support" and "resistance" levels--can yield important clues about stocks' immediate direction.

Technical analysis is hardly foolproof, of course. But a stock's short-term direction often takes cues from its recent trading history--that is, who bought, how much, and at what price--as well as from changes in the underlying company's fundamentals.

*

The first key to playing the trading game, experts say, is to have access to real-time stock quotes and continuously updated charts.

"If someone thinks they're going to just sit down and watch the ticker on CNBC and trade off it, it's not going to work," said Stan Weinstein, editor of Global Trend Alert, a Hollywood, Fla.-based newsletter for institutional investors. "It's hard work [and] can pay off. But it's not as glamorous as people think."

To successfully trade volatile stocks, investors must be able to "read" chart patterns on a daily basis and then rush to take advantage of their signals.

For example, look at the daily stock chart of Yahoo that accompanies this story. Throughout Wall Street's summer pullback, Yahoo held up remarkably well. From July 17, the day the broad market peaked, through late August, Yahoo shares actually crept up. That was a key sign of strength.

Then, as the rest of the market went through the final spasm of the summer plunge, Yahoo sank 39%, from $96.88 on Aug. 26 to an intraday low of $59 on Sept. 1.

But the stock powered back to $72.25 by the Sept. 1 close and began climbing steadily.

By last week, Yahoo was approaching record-high territory. It's important to watch a stock in that situation, because it's extremely bullish if the shares reach a new high in a powerful surge--known as a breakout. That indicates a stock might "follow through" by going even higher.

A sign that Yahoo would break out came on Sept. 21, Weinstein said. On that Monday, the Dow industrial average fell 185 points early in the day. Yahoo, however, started off just $4 lower--which, "for that stock, was hardly down," he said--and flashed a green light to investors by ending the day up almost $6 on higher volume than on Friday.

"That was not just talking to you," Weinstein said. "That was screaming at you that that was real good action" in the stock.

Sure enough, Yahoo closed up the following day--Sept. 22--on even higher volume, then surged 15% on Sept. 23 to $117.88.

But traders also must realize that technical signs sometimes are misleading--or just early.

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