Investors have been hammered in Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) in more ways than one this week. But is it time to buy GOOGL stock’s pullback? Let’s take a look at what’s behind the price action, the technical picture and a limited-risk options strategy on Alphabet to better navigate the environment.
The consensus view earlier this year had been any political risks facing Alphabet would surely be coming out of China or from Capitol Hill. But it was a problem from across the pond and from our European neighbors in the U.K. that sent shares of GOOGL tumbling this week.
For the weekly period, shares of Alphabet are off about 4% after influential foreign ad buyers lashed out about how their ads had been placed alongside terrorist and other extremism media on Google’s YouTube. For its part, Alphabet is taking action and looking to improve its “brand safety controls.”
Improvements aren’t happening soon enough for some though. Earlier this week, as Barron’s noted, France’s Havas SA, the world’s sixth largest marketing agency, stated it had pulled the plug on all client advertising in the U.K. from both YouTube and the Google Display Network.
And now American companies are joining the ranks in protest as well.
GOOGL Stock Daily Chart
Just prior to this week’s sudden and volatile bout of profit-taking, GOOGL stock had been making all the right technical moves. Since the beginning of 2017, shares of Alphabet managed to successfully clear the prior all-time highs, rally, establish a successful test of support and then proceed to even higher highs.
Now — despite the quick drop of around 4% this week — our view is Alphabet could be setting up as a pullback entry. For the more quick-fingered among us, the hammering of shares by Thursday’s close actually formed a bullish hammer low.
The reversal pattern has some backing from an oversold stochastics condition and received price confirmation early Friday as GOOGL stock moved above the candlestick’s high of $841.69.
Is it perfect? No. There has been some distribution, the current setup is modestly below the well-watched 50-day simple moving average and trends do eventually end.
Personally and given the mixed evidence, I’d rather look at entering into GOOGL stock if it were to trade down into a support zone from around $795 – $825. The potential area of support holds a couple retracement levels, the 200-day simple moving average and a second test of the prior highs, and amounts to a correction of up to 9% within the bigger picture’s established uptrend.
GOOGL Long Put Butterfly
Given my belief that the hammering may not be completely done in Alphabet, I like the idea of an atypical approach to positioning for downside and buying stock at lower levels.
With GOOGL near $840, the April $835/$820/$805 is priced for $2.20 or better. The bearishly targeted butterfly achieves its maximum profit of $12.80 if shares fall 2.5% to $820 on expiration. More achievable, the limited risk spread maintains a profit range from $807.20 to $832.80 and prior to that third Friday, gains can even be realized outside the targeted price zone.
If GOOGL stock actually begins to rally in a material way, I would personally look to cut risk using a money stop of 50%, or $1.10. While the initial debit is small, holding on and remaining on the wrong side of price action in a name the trader ultimately wants to own at lower prices doesn’t make sense.
Were shares of Alphabet to fall below $805, the trader will be out the full debit. However, if the end game is buying GOOGL on weakness as it enters the support zone, knowing the most you’d pay for the stock is $807.20 and possibly a lot less, is worth considering.
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.