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If Yelp Is to Get Help, Now's the Time

The stock gapped down after disappointing earnings, but has been creeping back up.
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Yelp (YELP) , a website that provides reviews for restaurants and other local businesses, has fallen out of favor. The once-hot stock is down nearly 13% year to date after gaining 32.4% last year. Can Yelp get back on track? According to the charts, if this stock is going to turn its fortunes around, now is the ideal time.

Last November, Yelp bounced nicely off $32 (point A), creating a support level (dotted line). The stock subsequently rallied to the $43 area (point B) for a gain of about 34%. After a disappointing earnings report in February, Yelp gapped down sharply and continued to drift lower. That is, until the stock finally closed just below $32 on March 28 (point D). Since then, the stock has crept higher.

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Last week, two of Yelp's indicators flashed buy signals. Its RSI (relative strength index) indicator gave a buy signal on March 29 (point E), and the stock's MACD (moving average convergence divergence) confirmed this with another buy signal on Friday (point F).

Note also that those two indicators made higher lows (HL) while the stock was still forming lower lows. In technical-analysis parlance, this is known as bullish divergence. According to theory, the stock should follow the indicators higher.

I'm buying Yelp for a trade. The company reports earnings on May 11, and depending on how the situation develops, I plan to close some or all of the position before then. Naturally, $32 is the key; if the stock falls significantly below that level, I'll close the trade.

I'm aware that there were buyout rumors swirling around this stock yesterday. Apparently, the April weekly $33.50 and $34 calls were active yesterday morning. It would be nice if those rumors turned out to be true, but I'm buying Yelp because its chart indicates the stock is at an inflection point, not because of some random rumor. Most rumors are false, and people who buy on rumors often wind up owning stocks they wish they hadn't bought.

Personally, I don't believe Yelp is going to be purchased. Rumors often appear immediately after a buyout -- in this case, this week's purchase of Panera Bread (PNRA) by Luxembourg-based JAB Holding. Speculation is high after such an event, perhaps because everyone is wondering which company might be the next to be purchased.

At the time of publication, Ponsi was long YELP, although positions may change at any time.