Software giant Oracle Corp. (ORCL) has traded in choppy waters since its May 2011 highs, marked by vicious sell-offs, equally sharp reversals and nasty post-earnings gaps down. Most recently, the stock was clubbed to the tune of almost 10% after the company's fiscal third-quarter earnings announcement in March, but rebounded quickly and has since strung together a series of higher lows that could now lead to a breakout for a gap-fill trade.
As the S&P 500 bounced off the solid support area near 1,540 on April 19, the technology sector also found solid footing again. Over the next three weeks, the Technology Select Sector SPDR (XLK) rallied a strong 8%, and along with the materials and energy sectors, led this most recent rally higher.
This steep ascent has now brought XLK to a key resistance point at $31.75 that dates back to September 2012. While near-term momentum remains in favor of the bulls, should the sector be able to surpass that high on a daily closing basis, chances are high that some mean reversion would kick in, which should eventually lead to at least a 2%-3% correction.
It is within this context that I now look at both the weekly and daily charts of Oracle.
Off its 2009 lows, ORCL rallied about 170% before topping out in May 2011. From there, along with the broader market, the stock began a meaningful correction of about 50% of the entire rally.
Like most U.S. equities, ORCL then found a key bottom in late summer/early fall 2011, which over the course of the ensuing eight months, was retested two more times, thus forming a significant support area near $25-$26.
By May 2012, the stock had done enough consolidating of the initial rocket launch off the 2009 lows and pushed higher all the way into March 2013. That move up finally ended near $36.50, which matched the stock's May 2011 top. In a classic double-top formation, the stock then quickly corrected.
Five trading days after forming the double-top, ORCL staged a meaningful gap down following an earnings announcement. The 10% one-day drop was followed by two more down days, which was likely enough to trick most bears not considering the larger forces at work (central bank magic and better-than-expected broader economic improvement) into pressing their shorts in the stock.
Fast forward one month and by mid-April ORCL had developed a nice series of higher lows and higher highs, which took the stock to a crucial area of resistance last week near $34. This is now the only thing stopping ORCL from moving higher to fill the March 21 post-earnings gap down. If the stock is able to push higher from here, there is a good chance it will move to $36.
Recommended Trade Setup:
-- Buy ORCL on a daily close above $34
-- Set stop-loss at $33.30
-- Set initial price target at $35.80 for a potential 5% gain in 3-6 weeks