Is Alphabet Finally Showing Cracks In Its Coronavirus Resilience?

In an environment where nobody knows where global business will be in the next six months, I find it mind-boggling that the Nasdaq is but two points away from being positive for 2020. It is also within an earshot of all-time highs. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) rallied 2% on Tuesday and it almost triggered another bullish pattern higher. And therein lies the opportunity. GOOG stock could have another big rally brewing.

Is GOOG Stock Finally Showing Cracks In Its Coronavirus Resilience?
Source: turtix /

But, before we dive into what makes Alphabet stand out right now, let me temper your excitement a bit. After all, making a play on GOOG stock now fits better with a trading mentality, than a traditional investing approach. Here’s why.

With so much going wrong with the world, we should taper our optimism. This is coming from someone who was bullish in 2019 when the consensus was doom and gloom.

The bulls have been clearly in charge of GOOG stock since the novel coronavirus-induced bottom. The buyers have almost erased the entire correction. From top to bottom it was down 34%; Google has since rallied back 35% from the trough. The cluster between $1,268 and $1,400 per share is pivotal; therefore, it should be sticky.

This means the bulls should rest before bursting through it as they are doing right now. In mid January, I wrote about GOOG stock, suggesting that there would be better entry points. If you listened to me then, you would have missed out on 5% of upside but also 30% of downside.

Ideally, I would like to see the stock dip towards $1,240 per share and form the handle of the cup-and-handle bullish pattern. When this happens, ownership of GOOG stock would then transfer into stronger hands. It would be supported by stronger conviction and have a better chance at breaking out from the resistance above.

Accordingly, the smart trade is to wait for the breakout from $1,375 per share and chase it to challenge the all-time highs. The price action has been constructive for a few weeks. It has made higher-lows and higher-highs consistently, so it is only normal for it to breathe a little. It can fall into a support zone, which, in this case, is at $1,280 per share without changing the direction.

Fundamentals Matter Now More Than Ever for GOOG Stock

Fundamentals Matter Now More Than Ever for GOOG Stock
Source: Charts by TradingView

The fundamentals in Google are above reproach because that’s what we learned from their earnings report last week. The company surprisingly delivered strong financial results and still sports a very healthy balance sheet. This is a time when a strong balance sheet matters more than ever. It is pivotal to the confidence that investors have in a stock.

Take Disney (NYSE:DIS) for example. The company suspended its dividends last night during its earnings call. This created new worry surrounding the stock that wasn’t there just hours ago. Cash is scarce for businesses these days, especially when they have no sales flowing through their top lines. Google is lucky enough to benefit from the online demand as everyone is stuck at home from the quarantine.

Fundamentally, GOOG stock is not a screaming bargain. It has a price-to-earnings ratio of 27 and sells at 5.7 times its sales. While this is not bloated, it’s not a selling point either at these price levels. However, it is low enough that it would be an asset if and when markets in general correct.

When Wall Street is nervous it sells froth and buys value. Alphabet presents a good balance of both. Recently, we’ve seen relative strength in the Nasdaq because tech has the reputation of being the thing to buy during a recession. Google also doesn’t carry a lot of fat, so there isn’t as much to lose as with a stock like Shopify (NYSE:SHOP) for example.

The Economy May Not Have Bottomed Yet

The bigger picture remains full of macroeconomic uncertainties. Although I do not worry about Alphabet itself, I am scared for the entire stock market. And this is where I want to remind you that I am not a perma-bear. But there is a chance that all the rescue efforts that governments are throwing at the crisis fail, and in that case, the recent lows will not hold. There are technical scenarios to support an S&P 500 at $1,800.

I am not calling it as my base case, so put the daggers away. But it’s a scenario that exists, and one in which GOOG stock could trigger another leg lower towards $850 per share. I know this may freak out a few readers, but this is strictly an evaluation of all technical possibilities laid on top of the fundamentals.

There is no doubt that the global macro-economies are badly bruised. Only time will tell if the trillions that our governments are spending will actually bring us out of this hole that we dug ourselves into. Remember this is a recession that we scheduled like a dentist appointment. And therein lies the hope that we can “un-schedule” it as quickly as we set the appointment.

No matter what happens, the way back to growth will take a bit of work.

Nicolas Chahine is the managing director of Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.

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