Time for a Play on Dangdang?

 | Feb 28, 2014 | 9:30 AM EST
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E-commerce company China Dangdang (DANG) was among the top stocks grabbing the headlines on Thursday morning.

Dangdang operates as a business-to-consumer e-commerce company in the People's Republic of China. The company's specialty is as an online book retailer and it posted its fourth-quarter earnings ahead of Thursday's opening bell. Dangdang announced earnings of $0.04 per share on revenue of $325.7 million. The company had struggled with profitability and analysts were anticipating a loss of $0.11 per share with revenue of $317 million. The announcement was a happy surprise for many and brought Dangdang back into the spotlight.

Dangdang had originally enjoyed a strong partial recovery this past summer. Shares in the company began to struggle a mere two months after this ADR made its debut on the NYSE back in late 2010 at $24.50 a share. By the end of 2012 it was trading as low as $3.68. It retested the zone of this low last spring, but by early August it had risen strongly to strike $12 a share. This level had been initial support in 2011 and resistance in 2012 on its first recovery attempt.

Unlike in 2012, last summer's recovery held. Instead of reacting sharply to the price resistance and returning to lows, Dangdang hugged it, making multiple tests of the resistance zone in the months that followed. As it did so, volume declined. The declining volume was the most evident during periods of selling, suggested that the bears were finally backing away on this one. Additionally, each wave of upside within the daily and weekly trading channels was stronger than each of the corrective moves. This shift became even more evident from November 2013 onward.

Dangdang has been on my watch list for quite some time due to the action described above. But I must admit that I was waiting for another major monthly low to form before doing much with it and thought that it would be closer to this summer before we saw too much action. Thursday's earnings may be just enough of an incentive to consider getting involved a bit earlier, keeping in mind that there will be the risk of a retracement back into the larger monthly trading range in the weeks ahead before a stronger recovery may have a chance to take hold.

My target on Dangdang over the next 12-18 months is $20 a share, but as an e-commerce site its performance is quite likely to be closely linked to the Chinese economy. As a result, investors will want to keep an eye out for the economic data releases out of China as potential driving forces behind Dangdang's recovery or fall, as the case may be.

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