Despite the rally in Google (GOOG, GOOGL) stock over the past few days, indications suggest that technical traders are likely to take the Internet giant’s price about 10% lower over the near-term. Our forecast comes from a typically dangerous combination of optimistic sentiment and eroding technical support.
Let’s start with a look at GOOGL’s technicals.
As mentioned, Google stock has been trading in a range since February. After spending some time stretching up to $580, shares have experienced a tightening of prices between $540 and $560. The tighter range suggests that a larger move is building for Google stock, like a spring being compressed.
The trendline analysis of GOOGL suggests that underlying support is eroding. Currently, Google stock is trading slightly above its 50- and 200-day moving averages, but that may not be enough to provide support for the shares. As of May 7, both of these trendlines were declining, which has bearish implications.
According to our historical testing, GOOGL is more than twice as likely to see a decline over the following month when both of these trendlines are declining. The odds go even higher if/when the stock price itself moves below these trends, which is likely to happen over the next week or so based on recent trading patterns.
Adding fuel to the bearish fire is the current sentiment profile for Google stock. According to the most recent analyst recommendations data, 81% of the analysts covering GOOGL shares have them ranked a “buy.” This suggests that the stock could be crowded with bullish investors.
Historically, stocks that are crowded trades tend to see more selling pressure when technically triggered as there are more people trying to sell the stock — like if someone were to shout “Fire!” in a crowded theater.
In addition to the normal sentiment indicators we watch, there is an interesting dynamic within the options market that suggests some overhead resistance at $550 for GOOGL, which could also pressure the stock. A look at the stock’s current open interest for June options reveals massive call and put open interest at the $550 level.
It is our experience that strike prices housing large open interest can act as a magnet for shares. Given this, we will expect to see Google stock try to stay close to this price, however a move too far below will repel share prices even lower
The current indicators for Google shares suggest the shares will dip to the $500 level (site of the January lows) before finding chart support that would tempt us to step in as buyers. Anyone holding GOOGL stock may want to consider locking in profits with a stop-loss at $550. More aggressive traders may consider buying a few puts on GOOGL to potentially profit from our forecast.
As of mid-week, the July 545 Put option (priced at $7.40 per contract) appears attractive as it could more than double if the stock moves to our short-term target price of $500 before the third Friday in July.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.