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Traders Could Book a Quick Profit if This Stock Enters a Free Fall Zone

Social networking company LinkedIn Corporation (NYSE: LNKD) has been a volatile stock since it began trading in May 2011. Although it is higher by about 50% year to date, it has experienced a few rocky weeks that now have it sitting on thin support. While LNKD is still well-positioned to go higher through the longer-term lens, a break of support on the near-term chart would set up a nice short trade with defined risk.

With only 24 months under its belt as a publicly traded company, LinkedIn has surprised many a naysayer with its business model and financial results. And the stock's price more than doubling since its IPO is also a testament to the firm's success. 

Like many social networking stocks, however, plenty of questions about the business model and revenue sources remain, so these stocks are likely to continue to trade with elevated volatility.

On the weekly chart, we note that through most of 2011 the stock traded in big swings that were not for the faint of heart. After it found a bottom in late 2011, it strung together a sharp rally into the first half of 2012. This then led to a still choppy but more orderly sideways consolidation phase that was roughly $30 wide and lasted from May 2012 until early February 2013. 

On Feb. 8, after the company reported its fourth-quarter earnings the night before, LNKD gapped higher at the open and never looked back, closing the day up more than 20%. It was a game-changer of a day as the rally snapped the stock out of its consolidation phase and gave it enough momentum to rally all the way into its next earnings announcement on May 2. 

LinkedIn Stock Chart - Weekly

After reporting earnings in May, the stock responded with a bearish gap down day, which after a few days of consolidation, was followed by a bearish shooting star candlestick on May 15.

During the past two weeks, LNKD continued to work its way lower down to a critical lateral support level around $167-$168, which also happens to just about coincide with a 50% Fibonacci retracement of the early February to early May rally. A daily close below $167 support could see the stock fall quickly to $155.  

LinkedIn Stock Chart - Daily

There are two things traders should keep in mind with this trade. First, just because support gets broken does not mean a stock immediately falls into the abyss. More often than not, the going gets choppy for a few days before ultimately resolving lower. 

Second, while LNKD would enter somewhat of a "free fall zone" below $167, that doesn't mean the stock will fall all the way down to the early February breakout levels near $126. Traders should monitor the situation closely and take profits after an initial 5% slide.

Take a stand but stick to your rules when trading a volatile name like LinkedIn.

Recommended Trade Setup:

-- Short LNKD on a daily close below $167
-- Set stop-loss at $175
-- Set price target at $155 for a potential 7% gain in 3-6 weeks