Wall Street had its first chance to respond to Alphabet Inc’s (NASDAQ:GOOGL) latest earnings announcement yesterday. The king of search was weighed, measured and found wanting. But while the punishment was swift, it wasn’t all that painful. By day’s end, GOOGL stock shed a mere $29 off its lofty price tag which translates into a 2.93% haircut.
The price gap certainly ranks among the mildest of Alphabet’s recent earnings reactions.
Like a true technician, I care little about the actual earnings numbers and much about how the market is digesting the information. As the old saw goes, it’s the reaction to the news that matters, not the news itself.
So did Tuesday’s drop change the big picture for GOOGL stock price? Or was it mere noise, a tempest in a teapot?
If you want the short answer — it’s the former. For the long answer, read on.
Alphabet’s Weekly Chart
For starters, I caution anyone on giving undue influence to any one day’s performance. While earnings days always deserve more consideration than a typical trading session, the mildness of Tuesday’s drop dampens its significance.
To add context, consider this: Heading into earnings, GOOGL shares were up just shy of $206 year-to-date. A $29 decline is a drop in the bucket in comparison. So, not surprisingly, Google’s weekly chart has changed little after earnings.
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The trend remains bullish with the price stacked atop all major moving averages. Tuesday’s turn did create another pivot high at the $1,000 mark, reinforcing its significance as a battleground. On the downside, $915 bears watching. It is the closest support level and should hold if buyers want to maintain the integrity of Alphabet’s uptrend.
The best-case scenario for Google’s weekly chart is to see some further consolidation to setup a breakout trade over the $1,000 resistance zone.
On the volume front, we’ve now seen four distribution candles over the past two months. That means seller aggression is increasing. But with the tech sector still running strong, and prior support levels remaining firm, I see little reason to do anything bearish here.
Alphabet’s Daily Chart
The neutralizing of GOOGL’s short-term trend is easier to see on its daily chart. With Tuesday’s drop, we now sit near the center of its three-month range.
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The inability of the Relative Strength Index (RSI) indicator of generating an overbought or oversold signal since early-June confirms Alphabet’s trendless nature.
Absent a tradable chart pattern, it’s tricky to initiate a strong directional bet after a gap like this. The truth is the stock needs more time to settle in and form a swing setup. However, with the overall weekly trend still pointing higher, not to mention the tech sector’s continued dominance, I think buyers still deserve the benefit of the doubt.
And it’s not as if GOOGL doesn’t have a strong history of recovering from earning-induced corrections in recent years. Every one has turned out to be temporary, and a stellar buying opportunity.
Throw it all together, and initiating bullish option positions in the days to come looks to be the way to go.
How to Trade GOOGL Stock
Since Alphabet is likely to chop around a bit as the earnings gap is digested, I suggest building a position designed to profit from time decay. The trade will also carry a high probability of profit. To provide a greater margin of error, we’ll use September options.
Sell the Sep $910/$900 bull put spread for $1.65 or better. GOOGL options are a bit illiquid, so limit orders are a must here. The reward is limited to the initial $1.65 and will be captured if Alphabet shares sit above $910 at expiration.
The max loss (and cost) of the position is $8.35.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
