Research In Motion shareholders got tossed into a meat grinder last week, after quarterly earnings triggered a massive decline. The stock has dropped more than 20% in the last four trading days, despite end-of-quarter mark-up pressure, and is back to mid-July levels. In other words, it has given up nearly every penny of the summer rally.
This isn't the first time that an earnings report from the tech giant has triggered a violent reaction. In fact, the same thing happened exactly one year ago, when it dropped over 26 points overnight. Ironically, that decline began in the same price zone as last week's swan dive, meaning this issue has shown a zero return in the last 12 months.
The company, headquartered in Waterloo, Ontario, came public on the U.S. exchanges near $1 (U.S.) (pre-split) in 1999. It lifted to $29 during the tech bubble and dropped down to its IPO price at the end of the 2000 to 2002 bear market. The stock then entered an historic bull advance, rising to $137 in 2007, at the same time the major indices were topping out, ahead of last year's crash.
Nearly all of the multiyear rally gains were posted during a 17-month period between June 2006 and November 2007 (gray box). Realistically, this was the only time in the last decade in which RIM investors showed superior returns. That's a sad statement, given this issue's inappropriate standing as a market leader and tech juggernaut.
The stock entered a broad topping pattern after the long rally, posted a marginal new high at $148 and then dropped like a rock with the broad market. The downtrend ended in the mid-$30s in December and tested that level in March, posting a double bottom reversal (red line). The subsequent recovery tacked on 50 points in just over three months.
Of course, market-timers could earn a fortune on this stock, given the massive up-and-down swings in the last 10 years. But as we learned in 2008, investors tend to be poor market-timers, buying near big highs and selling near big lows. So the real question as we head toward 2010 is whether or not this Jekyll-and-Hyde issue deserves a place in anyone's portfolio, given the pain it has dished out over the years.
This year's recovery ended at major resistance, which was generated when the 2007 to 2008 top broke down last September. Although the summer rally felt good to investors, you can see that the upside actually stalled in June, with the stock dropping into a sideways pattern and underperforming the broad indices for over three months. Perhaps this divergence was a warning signal for last week's huge nose dive.
But there's some good news here. The recent decline has dropped price into, but not through, five-month support in the low $60s (green line). The stock could easily make a stand at that level, although it might take several weeks, and start to recover lost ground in the fourth quarter. However, given heavy distribution noted in the big red volume bars, major progress is unlikely until next year, at the earliest.
The 200-day moving average needs to hold this rapid decline, in order to support a recovery in the weeks ahead. The stock is now trading under that level, but it often takes several weeks to set tradable boundaries driven by this major line in the sand. So let's watch and see if selling pressure eases up and price bounces back into the low $70s.
Longer term, the Research In Motion outlook is tied to three huge gaps. Two consecutive September down gaps will limit upside progress for the foreseeable future, while April's 20% up gap between $50 and $60 should limit any decline. The 30-point range in between these big holes might feel like good running room, but, in fact, the distance isn't too significant, given this issue's high volatility.
Anyone interested in owning the stock, despite its unpleasant history and the high current risk, should avoid the rookie error of buying strength if and when price moves back to the top of the broad trading range. Instead, enter your positions over several months using dollar cost averaging, keeping the entry price in the $50s and $60s, if possible.
In any case, all owners should take a firm pledge to become market-timers, booking aggressive profits if and when price reaches a big barrier, where downside pressure is likely to return. That's exactly what current shareholders wished they did before last week's catastrophe, instead of buying into the bullish chatter on this wickedly dangerous stock.
Alan Farley is a private trader and publisher of Hard Right Edge, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of The Daily Swing Trade, a premium product that outlines his charts and analysis. Farley has also been featured in Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. At the time of publication, Farley had no positions in stocks mentioned.