Google's Muddy Retreat

From The Chart Room
Google's Muddy Retreat
Adam Hewison, 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.

Adam Hewison is president of More of Hewison's charts and analysis are available at MarketClub and

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