This week, large-cap technology stocks such as Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) begin reporting their latest batches of earnings, which could result in some great trading setups for traders and active investors to sink their teeth into. As I often highlight in this column, much higher-probability trading setups come to fruition once any given company has reported earnings, as opposed to taking a gamble before earnings reports on how a stock may react to the report.
As of this moment, large-cap technology stocks make up nearly 25% of the S&P 500 index.
Historically speaking, this is a high-percentage amount of the total index, which is to say that any corrective move or even just a pause in large cap tech could jolt or pause the broader market very quickly.
I always highlight how stocks as an asset class are very highly correlated, as opposed to, say, commodities or even currencies. This is important to be aware of because if GOOGL stock were to drop 5% in any given day, it would likely reverberate around the technology sector, which in turn would see ripple effects throughout the U.S. stock market, particularly at this juncture.
GOOGL Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
With all of this in mind, note that GOOGL stock on the multiyear weekly chart in early January broke out and above the upper end of its longer-standing up-trending channel. Through this lens, the stock has thus taken its chart parabolic.
To be sure, this chart looks very similar to other technology heavy weights such as that of Amazon.com, Inc. (NASDAQ:AMZN). Also note that the weekly MACD momentum oscillator a the bottom of the chart is in record overbought territory.
Moving averages legend: blue – 8 day, yellow – 21 day
On the daily chart, we see that GOOGL stock has nicely albeit steeply climbed along its blue 8-day simple moving average so far in 2018 and out of the previous consolidation area that I marked with the blue box.
So, what is the trade setup following Alphabet’s earnings on Feb. 1?
Given the aforementioned charts, regardless of whether GOOGL stock were to rally or falter following the earnings report, an opportunity for a mean-reversion trade lower is likely to set up for active investors and traders. More specifically, a re-test of the $1080 area (previous resistance could then become support).
If GOOGL stock rallies after earnings it would further extend itself to the upside and thus improve the odds of slipping into marginal short positions or long put or put spread trades. Conversely, if Alphabet stock were to drop after earnings it could signal the beginning of such a pullback and that too could allow for such near-term bearish bets to be placed.
Check out Anthony Mirhaydari’s Daily Market Outlook for Jan. 31.
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