Changyou.Com Ltd (NASDAQ: CYOU)

Changyou.com Limited develops and operates online games in the People’s Republic of China. It is primarily involved in the development, operation, and licensing of massively multi-player online games, which are interactive online games that might be played simultaneously by various game players; Web-based games, which are played over the Internet using a Web browser; and mobile games that are played on mobile devices and require an Internet connection. The company also owns and operates Web properties and software applications for PCs and mobile devices, including the 17173.com Website, an information portals for game players in China; the wan.com Website, a games portal that provides a collection of Web games of third-party developers to game players; RaidCall, which provides online music and entertainment services, primarily in Taiwan; and the Dolphin Browser, a gateway to a host of user activities on mobile devices, with its users in Europe, Russia, and Japan.

Take a look at the 1-year chart of Changyou.com (NASDAQ: CYOU) below with added notations:

1-year chart of Changyou.com (NASDAQ: CYOU)

After rallying nicely from mid-October until the beginning of May, CYOU has been trading mostly sideways over the last 2 months. During the sideways move the stock has formed a common pattern known as a rectangle. A minimum of (2) successful tests of the support and (2) successful tests of the resistance will give you the pattern.

CYOU’s rectangle pattern has formed a resistance at $35 (red) and a $31 support (green). At some point the stock will have to break one of the two levels.

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The Tale of the Tape: CYOU is trading within a rectangle pattern. The possible long positions on the stock would be either on a pullback to $31 or on a breakout above $35. The ideal short opportunity would be on a break below $31.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Follow me on Twitter: @cmtstockcoach