Shares of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) shed 2.8% last Friday on the back of a note by Citigroup saying search engine advertising spending may be slowing. Through a technical lens, GOOGL stock has been trading in a precariously weak pattern for some time, so with last Friday’s selling, the bears look to be one step closer to break the stock below a key support area.
But one quick thing to note before going any further:
As of this morning, equity futures are trading sharply higher, including the price of GOOGL stock. This comes on the back of a change in the Brexit polls which now seem to indicate the U.K. will vote to stay in the European Union.
I expect plenty of volatility this week as traders jitter around any new headline regarding Brexit polls, but barring a major turning up of the chart of GOOGL, I think this trade setup remains intact.
Now, on to what’s pressing on Alphabet:
While last Friday’s selling in GOOGL stock may well have been influenced by the aforementioned comments by Citigroup, we must also respect the possible influences on the stock price by the quadruple witching options expiration day. On big options expiration days such as last Friday, a significant part of the movements in stocks and indices is influenced by options expiration flow.
Thus it is possible that Friday’s price movement in Alphabet stock were exaggerated by the options flows, which is to say that traders should watch the price action today to ensure we don’t see a complete reversal of Friday’s movements before possibly getting into the trade idea I am laying out in this missive.
Alphabet (GOOGL) Stock Charts
On May 4, I last shared my thoughts around GOOGL stock and offered a cautious note. While the stock since then has largely treaded water and has not yet meaningfully broken lower, the fact that it has also failed to stick a rally and in May marked its chart with yet another lower high is telling in and of itself.
On the multiyear weekly chart, we see that since the 2009 lows, Alphabet shares have operated higher in two distinct legs, the second of which sported a notably steeper slope. Also note that the blue 100-week simple moving average has held as support since 2012, which now becomes my next downside target in the stock.
After an overshooting rally in February of this year, GOOGL stock sharply rejected the breakout attempt and has since formed another two lower highs on its weekly chart as marked by the red arrows.
On the daily chart we see that the series of lower highs in GOOGL stock since February has put increasing pressure on the black horizontal line of support around the $700 area. As I often say, the longer a stock weighs on a well-defined line of support, the better the odds ultimately are of a break lower.
Considering this line of support is now five months old, and Alphabet continues to form a series of lower highs, the odds of a break below this line in the near future are rather high.
Active investors and traders could look to buy put spreads or short the stock with a downside target in the mid-$600s, which also roughly lines up with the 100-week MA from the longer-term chart above.
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