Google Pattern Points to Earnings-Related Drop

by Rick Pendergraft | April 11, 2012 3:51 pm

google (goog) earnings[1]Not too long ago, Google (NASDAQ:GOOG[2]) was the darling of the tech world. The company garnered plenty of headlines as it went on a meteoric rise after its August 19, 2004 initial public offering, when it opened for trading at $100 a share. The attention the stock got was well deserved; by the end of 2007, the stock was trading at $750 a share, a gain of 650%.

Over the last few years, GOOG seems to have been replaced by Apple (NASDAQ:AAPL[3]) as the tech darling. AAPL has risen over 4,000% since August 2004, so it deserves the attention it is getting as well. Both GOOG and AAPL are trading in the $625-$650 range these days and they represent two of the highest-priced stocks on the market. Both companies have shown a disdain toward stock splits, thus perpetuating the high price per share.

AAPL still has a few weeks before they release earnings, but GOOG will release earnings after the closing bell tomorrow night. They might not garner the attention that AAPL does, but they are still the third largest holding in the PowerShares QQQ Trust (NASDAQ:QQQ[4]) and as a result, the earnings results will have an impact come Friday.

Google’s Sentiment Backdrop

Google may not be the most closely-watched tech name anymore, but the sentiment towards the stock is still pretty bullish. There are 41 analysts that cover the stock, with 14 rating it a “strong buy”, 19 rating it a “buy,” seven naming it a “hold,” and only one analyst rating the stock as a “sell.” These ratings are down a little from three months ago (when the company last reported earnings) as the hold ratings only numbered four and there weren’t any sell ratings.

Short sellers have shied away from GOOG in the last six months with the number of shares sold short declining from 5.8 million shares last September to 3.75 million shares currently. The short-interest ratio is a meager 1.6, but that is up from 0.7 in February. The rise in the short-interest ratio has more to do with a sharp decline in trading volume and little to do with the number of actual shares sold short.

The consensus expectation is that the company will earn $9.65 per share, which is up from a month ago, but down from three months ago. GOOG missed its earnings target in January when the consensus was earnings of $10.49 per share and the company actually earned $9.50. The stock dropped more than $53 the next day.

History Lesson

I did find one peculiar item of note regarding Google and their earnings releases. In each of the last four earnings releases, the stock was either in or close to overbought or oversold territory based on the daily slow stochastic readings. In each instance, the stock gapped in the direction of the stochastic readings after each earnings report.

For instance, last April the stock was approaching oversold territory and then gapped lower after the earnings announcement. Last July, the stock was in overbought territory when earnings were released and then the stock gapped higher. This was the case again in October.

In January, when the company missed its earnings target, the stock had just come out of oversold territory before the big drop in price. Right now the stock is approaching oversold territory again. If this pattern holds true, you should expect GOOG to gap lower come Friday.

As of this writing, Rick Pendergraft does not own share in any of the aforementioned securities.  

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