Think Alphabet Inc (GOOG, GOOGL) is an investment in a web-search company’s results? Guess again.
As nice as it is to think owning Google stock is participation in Alphabet’s fundamentals, that’s not quite the case. In the short run as well as in intermediate-term time frames, GOOGL and GOOG stock are predictions about how the rest of the market will feel about the company at a particular date in the future.
That’s an indirect way of saying traders — and even investors — who aren’t studying a chart of GOOGL as a means of gauging the market’s changing opinion of the company aren’t doing themselves any favors.
With that said …
Maximum Altitude Achieved
GOOGL shares may be up a bit today, and up 7% from their late-April low, but they’re hardly in an impressive (or reliable) uptrend. The current rally effort was only put into motion after Alphabet shares had broken below their 200-day moving average line (for the first time since the middle of last year), and even with the gains over the past couple of weeks, the stock’s still below all of its other key moving averages.
If nothing else, that’s a sign that the short- and intermediate-term momentum remains bearish.
That being said, perhaps the most alarming aspect of the current rally effort isn’t where it’s happening, but what’s missing: volume.
The daily volume since the April 29 reversal has been below average, and noticeably weaker than the bearish volume that upended GOOGL in mid-April. If this rally is to last, at the very least, it needs more participants.
That needed volume might materialize after (if) GOOGL stock can clear its short-term moving average. It’s a nasty potential catch-22 though, in that Alphabet needs that volume first to move above all that resistance converging around $743.
Zooming to a weekly chart of GOOGL offers a little more perspective on what’s holding the stock back. Simply put: It’s still struggling to justify its lofty valuation following a huge jump in July 2015 and another huge rally in fall. Alphabet has been unable to move beyond a ceiling at $794 since then despite ongoing earnings and revenue growth, though it’s tried a couple of times.
Interestingly, using that ceiling at $794 and a starting point of $491 (the last major low GOOGL made in early 2015), we can see a Fibonacci retracement line materializes at $678. That’s essentially where Alphabet shares found a floor in early February, pushing up and off of it to test $794 again. It ultimately failed that test, but at least the $794 mark was confirmed as an important ceiling.
That’s good to know, in the sense that it will make any move beyond $794 all the more meaningful. But it’s concerning because the more often a level is confirmed as resistance, the tougher it becomes to break past it.
The weekly chart of GOOGL also makes it clear how little buying interest there’s been at the lofty levels reached late last year. It could be a while before earnings catch up with the stock’s valuation.
Bottom Line for GOOGL, GOOG Stock
For the true short-term trader, GOOGL and GOOG stock both continue to offer lots of swing trading opportunities … as has been the case for years. Short-term reversals are the norm, and most of them have been relatively well-signaled.
It’s also worth noting right now that encounters with key moving average lines aren’t always meaningful, but when they do play a role in starting, stopping or continuing trends, they do so in a big way. With GOOGL within reach of a thick band of moving average lines between $743 and $747, such a make-or-break moment could materialize soon.
Be ready for either possibility; the intended direction should become clear soon enough.
As for long-term traders (aka investors) …
While Alphabet and its stock isn’t in any particular trouble, with a clear lack of buying interest at its recently achieved P/E of more than 30 — trailing and forward-looking — the stagnation in the $700s can’t be a surprise. You may want to get used to this range-bound action, and even keep an eye out for a break below $678.
If the market unravels and takes GOOGL and GOOG stock with it, that floor is likely the point where most investors will experience an “uh-oh” moment and open the selling floodgates.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
