Shares of large-cap technology companies such as Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) have helped lead the rally off the February lows thus far. While other sectors and even the broader market is still “at risk” of making a lower high and re-testing the February lows, plenty of large-cap tech names are now back near their January highs. GOOGL stock rallied about 13% over the past two weeks but is still plenty off its January highs. This now leads us to question if it will catch up or be a leading indicator for another possible bout of stock market volatility.
As I often highlight in this here column, stocks are a highly correlated asset class compared to other asset classes such as commodities and currencies. This positive correlation often times gets ignored by many private as well as institutional investors — a dangerous mistake. Yet being aware of the correlations within the stock market can also bring about a plethora of opportunities.
While other mega-cap technology stocks over the past two weeks have recaptured their January highs, GOOGL stock despite its sharp rally remains about 6% off its January highs — and therein lies opportunity.
GOOGL Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
For some perspective, note that the late-January/early-February sell-off brought GOOGL stock from notable overbought readings above its up-trending range back down toward the lower end of its range.
This type of mean-reversion move is nothing but healthy. The question now is whether the stock will revisit those January highs or once respect the upper end of the up-trend as marked by the green parallels.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, note that the rally off the February lows so far has brought GOOGL stock right back to the bottom of a down-gap from Feb. 2. I marked the still unfilled part of said down-gap with the gray box.
The trade setup here is very straightforward: One could buy GOOGL stock in hopes of a gap fill, which is to say that the stock would have about 4.5% of upside toward a well-defined target near $1,181.
From a risk management perspective, any notable bearish reversal on a daily closing basis would be a stop loss signal. One of my former mentors used to remind me daily that “you can always re-enter a trade.”
Check out Serge’s Daily Market Outlook for Feb. 26.
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