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Bearish Play Updates Sunday, August 10, 2003 - SOHU - close: 30.46 change: +1.01 stop: 34.30 *new*

We weren't the only ones to notice how much the Internet-related ADR's had climbed over the last year. Friday, Reuters featured an article about SOHU, SINA, and NTES, mentioning their phenomenal gains. The article cited triple-digit growth in online advertising and mobile text messaging as drivers of the stock prices.

We wish they hadn't noticed these companies or those gains that we think might be a bit too bubble-like. All three tacked on major gains Friday, with SOHU's 3.43 percent gains the smallest percentage gains of the three. Other Internet-related ADR's not mentioned in the article also gained, however, with IIJI, Internet Initiative Japan, tacking on a whopping 15.69 percent. All had been beaten down last week and were perhaps due for bounces. SOHU, SINA, and NTES gained on much bigger-than-average volume, however, not something we want to see.

Before adding those gains, SOHU dove down to $26.93, within $0.43 of our $26.50 target. We expect that this stock has attracted a lot of shorts as it moved from $4.00 to more than $40.00 in less than a year, and we suspect that some shorts saw an opportunity to cover at lower prices on Friday, leading to the spike in prices. We hope some of our own readers took the opportunity to reap some of those profits.

We think SOHU will drop again. Prices have plummeted more than $10.00 since July highs and it was time for a bounce. In addition, the violated ascending trendline has not yet been retested, and we think a retest was due. That support near $26.50 was a likely place for the bounce to occur, and the reason behind our choice of that level as our target. Studying the chart, we still see bearish divergence on the oscillators and several layers of resistance that converge near $34.30.

We also think it possible that $34.00 level will be retested. Play participants who do not want to weather a retest of overhead resistance with almost $2.00/share in unrealized gains might elect to book those profits.

The chart appears to show a budding head-and-shoulder formation, and if that formation is valid, a test of shoulder-level next resistance may be in order. The oscillators do not yet predict even enough strength to test that resistance. MACD appears bearish. Stochastics give a bullish kiss, but have not yet curved up out of territory indicating oversold conditions. Traders seeking a new entry could target a rollover anywhere under $34.00, the right-shoulder level of a possible head-and-shoulder formation.

Annotated Chart for SOHU:

Picked on August 6 at 32.27
Change since picked:  -1.81
Earnings Date:     07/23/03 (confirmed)
Average Daily Volume:   4.6 million

Link to Current Quote SOHU


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