Momentum remains on the side of technology giant
despite the large gains the it has made this year.
Following a big post-earnings rally in mid-October, GOOG
consolidated and is forming a tight bullish wedge pattern. This
offers traders another juicy long-side breakout trade.
Tight patterns often lead to quick moves. A break to new highs
would keep the momentum on the side of the bulls, while any break
below the consolidation pattern would be equally bearish and
serve as an automatic stop-out area.
Google reported third-quarter results after the close Oct. 17,
beating analysts' estimates on all fronts. Earnings per share (
) were up 19% to $10.74 from the same quarter a year ago, beating
estimates of $10.34. Revenue was up 12% to $14.9 billion,
slightly better than the consensus estimate.
As a result, GOOG exploded higher on massive volume on Oct.
18, and it hasn't looked back. Google's shareholders are no
strangers to robust post-earnings moves, but the 13.8% rally was
larger than usual, and it took the stock above $1,000 for the
first time, setting a new all-time high.
GOOG is up 43% this year, and while displaying a steep slope
and medium-term overbought levels, stocks in this type of pattern
can continue higher for longer than many can stay short. Because
we always need to consider both sides of the coin, however, I
would be remiss not to mention that if a bearish reversal were to
occur, it should be respected.
From more of a structural point of view, the broader U.S.
stock market, as measured by the S&P 500 Index, is higher by
about 24% this year. Many institutional investors remain
underinvested and most likely are underperforming the market.
Despite the fact that some mutual funds close their books for
their year on Oct. 31, most funds are open for business until the
end of the calendar year and are looking to buy dips or chase
Keeping this in mind, and also noting that GOOG offers good
trading volume, plenty of institutional research coverage and is
playing in an industry with lots of growth potential, we have a
stock that has a natural bid, at least in the medium term.
In terms of momentum,
Wilder's relative strength index (RSI)
on the weekly chart above are pointing in the right direction
(up) and have room to the upside.
Also, in a trend-following situation as is currently the case
for many institutional and individual investors in GOOG, momentum
oscillators can remain overbought for a long time, making them
fairly irrelevant. What would be noteworthy and make me more
cautious is negative divergence between the stock's price and
momentum oscillators, which is not yet the case.
Moving on to the daily chart, GOOG held its 200-day moving
average in early October, and with the post-earnings rally, broke
out of a multi-month consolidation phase. The fact that this
rally came out of a solid base rather than a steep slope further
supports the bullish case.
In the past two weeks since the earnings announcement, the
stock has formed a tight consolidation pattern, a break above
which could easily push it 5% higher in the short term.
Action to Take -->
-- Buy GOOG on a break above $1,035
-- Set stop-loss at $1,010
-- Set initial price target at $1,090 for a potential 5% gain in
two to four weeks
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