Google: Playing Defense Against the Bears

Since Google pulled back hard today it would probably be best to comment on the recent activity. I first warned of a descending triangle formation which can be seen by the red marking in the graph below. Once I saw a breakout to the upside I was initially relieved and thought the stock was out of the woods. Unfortunately my hopes began to fade as it became abundantly clear that the stock was simply extending its descending triangle pattern formation.

This is when activity begins to get interesting. The longer this stock traded in a tight and consolidated pattern the more explosive the breakout, or in this case, breakdown. When all was said and done, Google shares traded down $17.50 (-3.64%) at $462.80 near its lowest levels of the day.

So, let’s try to zero in on where the next levels of support are. $460 was briefly tested and I’m sure Google will find its way there again soon. If this area of support fails, my hunch is that it will be pushed back to major support near $440.

In addition to the indicators, you will also see the Fibonacci Retracements as shown below. I simply plotted out the percentage ratios from initial uptrend on breakout. Each line is extended out so as to measure a 38.2, 50, and 61.8% pullback from the beginning to the peak of Google’s trend. Think of these percentages as a wall, with 61.8% as the last line of defense. The stock is currently sitting on its 50% retracement and may soon drop further to test the 61.8% level. Anything below 61.8% is fair game for a complete breakdown, which is why the stock must hold firm sooner rather than later.

One discouraging note for longs is that Google never filled its gap from $430 to $452 on the way up. Usually these gaps are filled unless they are runaway gaps (rarer than your typical gap).

Overall, the analysts are all screaming buy and promoting this thing hard, saying that it will go to $550-$600 within the next 12 months. Typical for them, but I still like the long-term outlook here and believe that we will hit my conservative mark by the suggested time frame. However, if you still have a position here, things may get worse before they get better.

Good Investing…