Make Fear Your Friend
If stocks climb a wall of worry, a
bout of anxiety could be just the tonic for Oracle.
Shares in the No. 1 database software
provider sold off in early trade Wednesday on overnight news that the company
reported lower-than-expected software sales. But the stock rallied back by the
end of session to close near the high of the day’s trading range. Volume swelled
to double Oracle’s usual activity.
When a stock forms a handle near its
old high, as Oracle is doing now, you normally want to see volatility and volume
contract. That’s a sign that selling has abated in the stock, which primes the
price to move higher if a wave of strong demand comes to market.
But Oracle’s right-side recovery looks
rather sharp off May 24 low of 58 1/8. A V-shaped recovery tends to leave a
stock prone to profit taking. So a sharp downward move in the handle,
accompanied by a volume spike, can serve a useful purpose. It can clear out
those sellers. You want to see the share price bounce back in short order,
indicating new, bullish buyers are replacing the profit-takers. Oracle fits this
pattern.
However, once the spike occurs,
volatility should not persist. Now it’s time for Oracle to settle down and put
in a proper, conventional handle. The volume should dry up, and the price should
drift lower, but gently, indicating what selling remains is light. The buy
point, if Oracle forms a sound cup-with-handle and breaks out, would occur if
the stock moves 1/8 above the high of the handle on strong volume.
After Tuesday’s close, the company
reported earnings of 31 cents a share in the most recent quarter vs. 18 cents a
year ago. That handily topped analyst estimates averaging 25 cents, according to
First Call/Thomson Financial.Â
But some market players were worried
by Oracle’s slower-than-expected sales growth rate of 12%. That occasioned a
Merrill Lynch downgrade. Oracle CEO Larry Ellison sees stronger demand for databases
in the following quarter.
To me, there’s no major evidence yet
to doubt the profit outlook of this extraordinary company. But the market will
let us know — and probably before the analysts do.