Identifying bullish charts is a challenge right now, but perhaps not why one may initially think. The challenge isn't finding the charts, but narrowing the search down to a single chart or two. Today, one could easily march out Goldman Sachs (GS) or Halliburton (HAL) or Petrobras (PBR), even after its big bounce. AIG (AIG) has shaken off a potential breakdown and joins GS looking strong. Tiffany (TIF) and Chuy's Holdings (CHUY) are on the verge of moving into big upside gaps just waiting to be filled. Even the Qs (QQQ) and the SPDR (SPY) are coming up on the breakout scans and have fantastic-looking daily charts.
So, for today, I'll go with something a bit more speculative, setting up on the squeeze side of analysis. The risk here is a squeeze can break higher or break lower, so anticipating is risky. Most traders, myself included, should opt to wait for a break; but you have to be ready or alerted for the break as soon as it occurs. Though I won't speak on the fundamental side of Yelp (YELP) because it is a tough case to make, the chart of this stock looks ready to roll if we see a close over $49. Like TIF and CHUY, there is a gap, a BIG gap, nearly 20% of the current price waiting to be filled.
Yelp has traded in a tight channel for nearly two months. Volatility, as shown by the Bollinger Bands, has shrunk considerably. Rather than just the traditional Bollinger Bands, I added the Bollinger Band Width as a separate indicator on the chart, so it is clear the contraction we've seen recently. This happened back in January 2015, just before YELP made a 26% move lower. We haven't discussed option strategies much as of late, but this is one of those setups where straddles or strangles become an interesting consideration.
Further confirmation can be seen in the short-term Vortex Indicator that looks like it is just weaving back and forth currently. Even the Aroon Indicator, which is a trend measurement based on time relative to price rather than the other way around, reinforces the consolidation of YELP. The parallel decline, with both the red and green lines posting under 10, demonstrate a very tight consolidation. This indicator is measuring the amount of time since a stock last made a high and low within a specific time period -- in this case, 25 days.
While it is impossible to say whether YELP will break higher or lower from this consolidation, or even when it will happen, the current picture seems to favor a break higher, and a break higher in the very near future. I would certainly prefer to attack this one from the option side, with calls or call spreads. Any long position should not risk more than $3 here, as a close under $45 sets us up to quickly test $42.50 although I think a bearish break would ultimately have us see the high $30s this year. On the upside, the target is the gap fill to $56.
