Yahoo Buyout Analysis

Everyone is wondering where Yahoo will go to on Monday as a result of the Microsoft buyout.  I have received a number of emails about how to profit from this event.  Well, first let us turn to the charts to see the technical setup. 

Symmetrical Triangle

Since the beginning of 2008, Yahoo has traded in a clear symmetrical triangle with Friday's close landing right on the resistance line of this pattern.  As you can see from the volume in the chart, it was heavy during the creation of this pattern, begin to dry up as the pattern developed, and has now picked up again.  This type volume behavior is key when identifying symmetrical triangles.  The problem with this formation is that there is a 50/50 shot of the underlying security going up or down.  The one clue that helps traders is the strength of the trend preceding the pattern, and unfortunately, the trend for Yahoo was flat to choppy.

Yahoo Symmetrical Triangle

The Big Picture

The question I have received the most is "regardless of which way Yahoo breaks, how far can it run.  The simple answer to this question is a lot. When looking at the long-term picture of Yahoo, you will notice that there is a tight trading range with a high of $35 and a low of $20.  This makes for a $15 dollar range.  Basic technical analysis teaches us that you add the range to resistance to get an upside target of $50.  Conversely, to get a downside target, you simply subtract the range from support to get a downside target of $5.  This sounds extreme and I would have to say I agree.  The more conservative price targets are the recent swing highs and lows, which have held the stock in check for so many months.  Therefore, traders should assume that this buyout event will trigger a move with an upside target of $35 and a low price target of $20. 

Yahoo Trading Range

How Do I Profit From The Trade?

Many technical analysts discuss the charts, but they never explain how to make hard cash off a trade.  From our analysis, we have been able to come to no clear conclusion on which way Yahoo will breakout, yet we can see from the chart patterns, volume analysis, and the certain news event on Monday, that a move is imminent.  Now you could take the cowboy approach, pick a side, and let it roll, but this is a form of gambling.  A much more conservative yet extremely profitable trading strategy is to construct a straddle.  A straddle is an options trading technique, which allows a trader to profit off a large move, when they are unsure on which way the stock will break.  To read more about straddles, please visit:  http://www.mysmp.com/options/straddle.html.