Google (GOOG) stock is nearly 30% better so far in 2013, which makes chasing the stock to upside more and more difficult — at least in the near-term.
Over the past week, I have encountered a larger-than-usual number of inquiries regarding the stock as Google’s announcement last week about new-and-improved services got investors and traders excited about the company’s future prospects. From a pure contrarian point of view, that would be a first potential indication of price exhaustion, but let’s see what the charts tell us.
If we consider the multiyear chart of Google — which looks back all the way to the company’s 2004 initial public offering — the pattern the stock traced out off the 2009 lows looks similar to the one that ultimately led to a steep selloff from late 2007 to late 2008. See the steepening slopes in both cases (red dotted arrows).
To be clear, I am not calling for a large correction in GOOG — I am merely pointing out the steep slope of this year’s rise in the stock, which came on the back of an already steady uptrend off the 2009 lows.
What I am saying, however, is that the current rate of ascent in the stock is not sustainable on a medium-term basis and will eventually lead to a mean-reversion move, or at the very least a solid consolidation phase.
Zooming in close on a daily chart of Google, the stock’s sharp rise off the mid-April lows reveals that the stock is now dangling some 18% above its 200-day simple moving average, which is stretched by historical measures. To work off these overbought conditions, GOOG can either tread sideways and allow for the moving average to move somewhat closer to the stock price, or the stock itself can do mean-reversionists a favor and correct by a few percent, thus also narrowing the wide gap between stock price and the moving average, at least to some extent.
Longer-term, the momentum likely remains in favor of the bulls. However, as it pertains to the near-term price movements of Google, the stock flashed us with a bearish reversal May 16, and we saw a shooting star candle on Monday. Those daring enough for a cute short-side trade can consider stops at Monday’s highs around $921, while folks looking at the stock from the long side will likely find better entry points lower in coming weeks.