Momentum remains on the side of technology giant Google (Nasdaq: GOOG) 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 ( EPS ) 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 breakouts.
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.
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.
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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