For Truly Gutsy Traders: Tips on Playing Net Issues

Five weeks ago, Amazon.com's stock traded near $135. Two weeks ago, it was $73. Today, it's almost $116.

Talk about volatility; that's volatility on steroids. And Amazon.com isn't alone. In a stock market that itself is fluctuating widely, the volatility of many Internet-related stocks makes everything else look mild in comparison.

That means the hordes of individual investors who have been trading Internet stocks are taking on lots of risk. But the volatility also means that small investors can turn impressive profits--if they know what they're doing.

"Is there money to be made in some of these things?" asked Elaine Yager, technical analyst at brokerage Herzog, Heine, Geduld. "Sure there is. It depends on what [level of risk] you can stand."

After falling hard in late August, Internet shares have staged a rousing recovery that has brought many of the major stocks within striking distance of their all-time highs.

Certainly, some investors are buying and holding these issues for the long term. But with few of the firms profitable as yet, the stocks' swings have as much to do with raw emotion as with fundamentals.

What's more, trading patterns, and anecdotal evidence from many online brokerages, show that the moves in these stocks often are fueled not by institutional investors but by small investors who dash in and out of them--sometimes within the same day.

Their goal is to catch often brief but immensely powerful moves. For example, in just a three-day period last week, Yahoo (ticker symbol: YHOO) leaped $27, or more than 30%.

To some, in fact, Internet stocks' volatility makes them perfect for trading rather than investing.

For the stock market overall, "the circumstances are ripe for a wide-ranging, spastic market," said Gregory Nie, a technical analyst at Everen Securities. "Volatility will stay on the high side, and very aggressive traders try to take advantage of volatility."

Of course, rapid-fire trading flouts just about every long-accepted rule of investing, which hold that individual investors should do thorough research and invest for the long run.

But that being said, there's no question that many small investors are trading Internet stocks in hopes of a fast buck. And for those who insist on doing so, several technical analysis strategies can help.

These strategies--such as recognizing "breakouts" in stock prices as well as "support" and "resistance" levels--can yield important clues about stocks' immediate direction.

Technical analysis is hardly foolproof, of course. But a stock's short-term direction often takes cues from its recent trading history--that is, who bought, how much, and at what price--as well as from changes in the underlying company's fundamentals.

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The first key to playing the trading game, experts say, is to have access to real-time stock quotes and continuously updated charts.

"If someone thinks they're going to just sit down and watch the ticker on CNBC and trade off it, it's not going to work," said Stan Weinstein, editor of Global Trend Alert, a Hollywood, Fla.-based newsletter for institutional investors. "It's hard work [and] can pay off. But it's not as glamorous as people think."

To successfully trade volatile stocks, investors must be able to "read" chart patterns on a daily basis and then rush to take advantage of their signals.

For example, look at the daily stock chart of Yahoo that accompanies this story. Throughout Wall Street's summer pullback, Yahoo held up remarkably well. From July 17, the day the broad market peaked, through late August, Yahoo shares actually crept up. That was a key sign of strength.

Then, as the rest of the market went through the final spasm of the summer plunge, Yahoo sank 39%, from $96.88 on Aug. 26 to an intraday low of $59 on Sept. 1.

But the stock powered back to $72.25 by the Sept. 1 close and began climbing steadily.

By last week, Yahoo was approaching record-high territory. It's important to watch a stock in that situation, because it's extremely bullish if the shares reach a new high in a powerful surge--known as a breakout. That indicates a stock might "follow through" by going even higher.

A sign that Yahoo would break out came on Sept. 21, Weinstein said. On that Monday, the Dow industrial average fell 185 points early in the day. Yahoo, however, started off just $4 lower--which, "for that stock, was hardly down," he said--and flashed a green light to investors by ending the day up almost $6 on higher volume than on Friday.

"That was not just talking to you," Weinstein said. "That was screaming at you that that was real good action" in the stock.

Sure enough, Yahoo closed up the following day--Sept. 22--on even higher volume, then surged 15% on Sept. 23 to $117.88.

But traders also must realize that technical signs sometimes are misleading--or just early.

With its big jump on Sept. 23, Yahoo began to look "extended," given that it had soared 40% in less than two weeks. The stock then experienced what's known as a downside hook reversal the next day, Yager said. On Sept. 24, the stock intraday notched a higher high than it had the previous day, but the shares closed lower than the day before.

Volume was high, and, to some observers, the stock seemed to be signaling that at least a short-term pullback was ahead.

But so far, Yahoo has simply become even more extended, zooming $6.94 to a record $127.94 on Monday.

Not all Internet stocks are moving to new highs. Others seem caught in trading ranges. But they, too, can be profitable for traders, if the trading range is wide enough.

Naturally, "once you can identify a trading range, the idea is to buy at the bottom or near-bottom and sell at the top," said Michael Kahn, chief technical analyst for BridgeNews.

A trading range is about support and resistance--the levels at which, for whatever reason, new buyers seem to appear (support) or sellers get the upper hand (resistance).

Consider Amazon.com (AMZN). For most of July and August, it traded between $100 and $144. So $100 or so represented the support level for the stock. Technicians warn that if a stock breaks decisively below its recent support level, it may plunge quickly--which Amazon.com did.

Now Amazon.com is rallying again: It has jumped 50% in the last eight trading days. Technicians might argue that the stock is extended and due for profit-taking.

Meanwhile, for a breakout to occur, the stock would have to clear $144, a level it has neared but never pierced three times in four months.

In some cases, a stock's pattern may be tougher to discern. Look at the recent trend in Internet search vehicle Excite (XCIT). Its trading was sloppy at best until late August, when it dove about 50%.

Last week, the stock got a big boost--in heavy trading--when Excite announced a deal with Dell Computer (DELL) and other companies to offer a package of Internet services designed to get new personal computer buyers online.

With the stock at $42 now, a technician would be looking to see if Excite can slash through the recent "resistance level" of $48 to $49, which is where the stock faltered on rallies in late July and early August.

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A central element of any trading strategy should be to see patterns develop early and act on them right away, experts say--in other words, play them while they last. "When most people lose, [it's because] they're late," Weinstein said.

Traders also should quickly acknowledge when a stock is going against them--or against its recent pattern--and do as a Wall Street trader would: "If you're wrong, you've got to admit defeat early and get out," Kahn said.

Unlike many individuals, who tend to hold losers in the hope they'll rebound, pros sell newly purchased stocks if they incur even minor losses. Rather than risk bigger losses, many pros dump stocks if they fall as little as 7% or 8% from their purchase prices.

"These [Internet] stocks are going to go down 15 points in a day and you don't want to get caught," Kahn said. "You need to think like a trader. You need risk controls and have no ego. You've got to be prepared to take losses."

Times staff writer Walter Hamilton can be reached by e-mail at walter.hamilton@latimes.com.

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Wild Volatility = Opportunity + Danger

Well-known Internet-related stocks have been exceptionally volatile in recent months, creating plenty of opportunities for short-term traders to win big--or lose big. Here's a look at the price and volume trends in Internet search vehicle Yahoo Inc. and the price trends in online bookseller Amazon.com and Excite Inc., another search vehicle.

Yahoo, Monday: $127.94

Amazon.com, Monday: $115.63

Excite, Monday: $42.00

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Sources: America Online, Bloomberg News

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