Why I'm Bullish on Research in Motion

Technical analysts often discuss strange chart patterns and other quantitative statistics to justify their actions. While I find these viewpoints interesting, they can also be distracting. At his core, a technical analyst wants to buy what is strong and sell what is weak. If your trades are arranged in such a manner, and the market continues its pattern, profits will flow.

In the current market, it is easy to find what is weak. Look at the banking sector and you will see stocks that are low and continue collapsing. Should we short them? We could, but I find the risk too high. Before shorting banks, consider a trade I did two weeks ago in my weekly newsletter EPIC Insights. I bought a basket of six banks that are now on average 8% higher (when the market fell 3.3%). Such large outperformance highlights the risks of trying to push beaten-down stocks even lower.

Instead, I would rather look for strength in a declining market. When stocks show relative strength in a poor environment we should take notice. I have, which is why I have chosen Research in Motion (RIMM) as this week's technical trade.

RIMM is the maker of the BlackBerry smart phone. As one of Jim Cramer's "Four Horsemen" of technology, the stock became a favorite of momentum investors. Steady growth and a public addicted to its product allowed the shares to move from $21 to $145 (590%) in less than two years. While investors owning the stock did very well during this period, we know that all sharp moves higher eventually end and prices return to lower levels.

The collapse in RIMM's share price reflects the technical trends that invite us to trade. When RIMM declined from $145 to below $40 (72%) in just over two months, we see the development of three key downtrends (A, B, and C). A close above the final downtrend, which occurred in mid-January, indicates the pattern has turned bullish. Adding evidence to the bullish argument is that from the December lows, we see three clear uptrends (1, 2, and 3). These trend lines have acted as support to allow the shares to move higher. Combine the violation of three downtrends, the existence of three uptrends, a steadily rising 10-day moving average (MA), and a 50-day MA that has now turned higher, and RIMM looks like a stock that will continue higher.

Knowing we are bullish of RIMM, we turn toward price target and risk control. After such a swift decline, the stock could regain half its losses. This would imply that RIMM could rally toward $90, but I will settle on a lower target. RIMM's gap lower in late-September will act as resistance to any rally. Therefore, I set a price target near $75 (represented by the box). For risk control, we would need to see a close below $42 to indicate that the trend has turned bearish. I am not willing to risk capital with such a distant stop. Instead I will use trend line 2 as my stop loss and will close the position at $50. With $50 as a stop loss and a $75 price target, I recommend RIMM as this week's technical trade.

Comments

[Justsaynoto...:]

I predict you will get stopped out below $50 just before the Mobile Phone Congress in Spain the week of Feb. options expiry. Technical analysis is no doubt valuable but without longer term fundamentals the rug could get pulled out from under you at any time my friend. RIMM is a broken stock in a bear market rally. Glad to hear you're at least using stops.

Feb 02 02:50 PM

[jenny:]

RIMM is always about risk control. Its a volatile stock and always has been. I'm bullish on RIMM, although it seems in general investors disagree as sentiment fell and became pretty bearish (www.predictwallstreet....).

Feb 02 03:30 PM

[Nick Waddell:]

I'm more of a bottom up guy, so of course I see a lot of stocks that are "cheaper" than RIM. This is just one of those cases where the company is great and so the stock becomes overvalued at times. I see parallels with Amazon. It seems overvalued, but it also seems to be winning the space outright.

Feb 02 03:33 PM

[who:]

When do you expect 75 to be reached?

With the economy in distress and mass layoffs how will RIMM get back to mid 07 levels of business and have the same bullish outlook?

Feb 02 04:15 PM

[miclone83:]

RIMM sells Blackberries primarily to business users in corporations. The CFO's at corporations worldwide are cutting expenses RIGHT NOW! How many of these CFOs are saying to their people, "No new Blackberries until further notice."?

One CFO can block thousands of people i his company from getting a new Blackberry with a single email.

Feb 02 05:25 PM

[econjunkie:]

Wow, stops at 50? You only have 10% to go. With the amount of volatility that stock has seen, it could bounce past failure at any time.

Aside from this, I think your technicals are somewhat intriguing, but an abandonment of fundamentals, which have looked worse for RIMM with respect to their guidance for the company and the industry as a whole since last fall is troubling.

Feb 02 06:12 PM

[Warm_Paw:]

The sub prime crisis is a vapor lock of the financial system.
As confidence returns, so does money.
The sub prime crisis was 2/3 fractional reserve banking during diminished money supply and 1/3 pricking of the housing bubble.
The stimulus along with increased confidence will have markets roaring along by spring.
I see RIMM driving to new highs when this occurs.
If Steve Jobs passes away RIMM is a definite money maker.
Even in 1929 when the end was near, the money people kept capitalism alive and thriving. You people seem to think this time is any different than the past? The USA is going to put a closed sign on the statue of Liberty.
Inflation is the safety valve for the next leg.
You guys will buy at the end of the next surge. By then I'll be selling into you.

Feb 03 12:01 PM

[Justsaynoto...:]

Regarding "If Steve Jobs passes away RIMM is a definite money maker"
This has got to be the most idiotic statement I've read on a stock message board in a long time. I hope you aren't putting your money in RIMM based on the probability of Steve Jobs passing away you sick $%*#
I hope he lives long enough to see the Iphone render the Blackberry obsolete! Shouldn't be too far into the future!



On Feb 03 12:01 PM Warm_Paw wrote:

> The sub prime crisis is a vapor lock of the financial system. <br/>As
> confidence returns, so does money.
> The sub prime crisis was 2/3 fractional reserve banking during diminished
> money supply and 1/3 pricking of the housing bubble.
> The stimulus along with increased confidence will have markets roaring
> along by spring.
> I see RIMM driving to new highs when this occurs.
> If Steve Jobs passes away RIMM is a definite money maker.
> Even in 1929 when the end was near, the money people kept capitalism
> alive and thriving. You people seem to think this time is any different
> than the past? The USA is going to put a closed sign on the statue
> of Liberty.
> Inflation is the safety valve for the next leg.
> You guys will buy at the end of the next surge. By then I'll be selling
> into you.

Feb 03 02:34 PM

[Jim Hawthorne:]

Bullish on RIMM???

C'mon! A stock that was flirting with $150.00 back in June, 2008 and slipped down to diddle around with $37.00 just before last Christmas and now trades close to $60.00? This is a call???

My mother is 97 years old and she would have no trouble spotting this one!

Yep! A good call! Back in December!!! Now? Not so much... but still good for a few ticks in a bear market rally...

Feb 07 11:59 PM

[Justsaynoto...:]

Stopped out at $50 just like I warned you. Can't say I didn't tell you so!
Just say no to MOMO! lol

Feb 12 12:25 PM