A trend in motion might stay in motion. But when it comes to Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) a more friendly purchase or “good buy” is still far removed from a corrective “goodbye” that still has room to improve on the GOOGL stock chart. Let me explain.
As I wrote in mid-May when last discussing GOOGL stock — and which has become more than a bit relevant the past couple sessions — “it never ceases to amaze how quick the market can be to change its tune.”
The difference following Friday’s mini “tech wreck” and early follow-through on Monday is that GOOGL stock has gone from a widows and orphans, must-own investment to a baby being thrown out with the bathwater.
Catalysts for the sell-off have been few and far between, but does it really matter? Maybe investors are paying heed to Goldman’s recent warning or a pair of downgrades to the untouchable of late Apple Inc. (NASDAQ:AAPL) souring overly buoyant market sentiment?
The last time I checked, the market isn’t very responsive at sending out timely RSVP’s anyways.
The bad news is while GOOGL stock’s two-day corrective decline of 7% is impressive and I generally support the longer-term wherewithal of Alphabet, I don’t believe shares are a good buy right now and better opportunities are still forthcoming.
GOOGL Stock Weekly Chart
Looking at the weekly chart of GOOGL stock and just like in our last discussion, I’ll say it again — there’s little reason to buck the current uptrend in motion. Unlike last time, shares of Alphabet are, as mentioned, offering a decent-size pullback opportunity. That’s the good news.
Moreover, shares of Alphabet are pretty much right where they were when I wrote my last article warning of an overbought situation, and a less-friendly spot to position within the trend. Thus and for all but the most aggressive momentum type investors, a lightning-fast 7% correction is probably not a meaningful low.
Supporting that view, if we appreciate GOOGL stock’s relatively high price position versus the 40-week or 200-day simple moving average and how other recent corrections played out — there’s rhyming precedent that Alphabet is far from a good buy just yet.
Bottom line, GOOGL is in an uptrend. Yet very trendy merchandise of late also means the current discount is likely a friendly bargain on only a relative and tenuous price basis.
GOOGL Modified Bear to Bull Put Butterfly
Given my belief that Alphabet is still in position for a larger corrective move, but not being a bear per se, a modified July $890/$870/$830 put butterfly is an interesting candidate. With GOOGL stock at $972, the spread can be purchased conservatively for a small credit of around 10 cents.
What does this spread do for traders looking to buy Alphabet on a deeper pullback? First, if GOOGL doesn’t oblige and shares fail to trade significantly lower below $890, at expiration the spread goes out worthless. Since a modest credit was taken in, this is far from bad news.
Further, if over the next month the trader finds stronger reasons to buy GOOGL at a higher price than where the butterfly is stationed, that could always be an option without having suffered any losses in the interim.
Excluding the small credit, if GOOGL stock does move into the butterfly structure, an expiration profit zone exists from $850 to $890. As with all long butterflies, the sweet spot at $870 allows for a gain that approaches $20 in profit.
The compromise with this spread is if GOOGL simply rallies from here or during the life of the spread and no action has been taken, the trader is effectively on the sidelines with a less-than-satisfying credit. Nevertheless the spread fits our current outlook and where we might be comfortable buying shares of Alphabet.
The real downside for investors not committed to buying GOOGL could be the potential max loss of $20 below $830.
However, with an expiration breakeven matching the 40-week simple moving average and a price where recent corrective moves have tested or broken temporarily, the strategy offers an interesting alternative approach to profit on a deeper correction and/or buy GOOGL stock for a sizable discount.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT .
