From The Chart Room
Google's Muddy Retreat
Adam Hewison, INO.com 11.27.07, 3:00 PM ET
Google, the darling of the tech stocks, endured a nasty price fall earlier this month. And despite a week of apparent recovery, traders remain bearish about its near-term prognosis. Expectations are for the stock to stay in a wide trading range instead of resuming its bull run to new highs.
On Nov. 8, Google had its sharpest one-day point move for the year, dropping more than $37--a 5% loss for the day. In addition to ending what had been an amazing bull run for Google, the move triggered a key indicator, the Daily Moving Average Convergence Divergence line (MACD), to turn negative the next day for the first time since Aug. 23.
While several other indicators continue to predict a strong uptrend for Google, traders often pay close attention to the MACD to identify the beginning of trend reversals for stocks that have been in a long bull or bear run. The reversal of this indicator, coupled with the current Fibonacci retracements--also relevant to Google, as they are generally used to understand stocks that achieve new highs followed closely by a steep fall--signify that we likely won't see Google rebounding anytime soon.
As you can see in the chart above, the Daily MACD reversal on Nov. 9 was the first indication that the stock was in trouble.
This lagging indicator uses moving averages to alert traders to both the momentum and direction of a trend. For stocks in a strong trend, the indicator can be understood by a crossover system: When one line crosses the other, it signifies a change in trend.
Until the red line re-crosses the green line, we can expect to see relatively flat movement in the price of the stock, confirming that Google posted a top at $747.24 on Nov. 7.
The end of Google's impressive run and the development of a new top are confirmed by the Fibonacci retracement numbers, which show a resistance level for the stock at $697.55.
The horizontal lines that make up the Fibonacci retracements signal support and resistance levels. They are calculated based on percentages of motion between the most recent high and low--the three most commonly used being 62% (or specifically 61.8%), 50% and 38% (or specifically 38.2%).
When a stock reaches a new high and then falls to a support level, it typically retraces some portion of its upward trajectory until it faces resistance at one of the Fibonacci retracements.
In the case of Google, with a high established at $747.24 and a low put in place at $616.02, the following retracements are derived: 38% equals $665.32, 50% equals $681.93 and finally, 62% equals $697.55.
Yesterday's price reversal near the upper Fibonacci retracement level illustrates the resistances Google will face before it continues its climb to the top, set at $747.24.
In the short term, look for traders to proceed with caution when it comes to Google. We expect that Google will have to do a great deal more backing and filling south of the upper band (62%) of the Fibonacci levels. We would avoid trying to pick a bottom and would only consider going long Google when the Moving Average Convergence Divergence turns positive.
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