In a sea of bullish calls, I will offer a bearish one.
While fundamentally shares in Alphabet (NASDAQ:GOOG) could be a steal, with a historically low valuation and a steadily growing free cash flow, I will provide a bearish call based on the technicals.
Fundamentals address the value of the stock, while the technicals focus on what will be. To clarify, neither can tell the future but are simply working on the evidence available. Even if fundamental-based expectations prove correct, market analysts do not know when a revaluation will happen and therefore tend to provide a call over a standardized 12-month duration.
My call will be for the next couple of months.
Moreover, while the fundamentals are bullish over the long run, they are high risk in the short term, as tomorrow's results will also include valuations on the equity investments on the search engine's balance sheet, which could scare off traders.
Now, to my technical analysis.
On Friday, the stock completed a Rising Wedge. The pattern tracks the highs and lows of a rally. However, the lower trendline is steeper. That means that as much as buyers have been buying—represented by the lower trendline—the price would not go proportionately higher. While the lower trendline advanced 7.9%, the upper trendline eked out a 1.75% gain, a little more than a quarter of the lower trendline's move upwards.
Presumably, bulls are running out of money or patience, which is why the uptrend trendline failed to support the price on Friday despite increased volume.
Also, in yesterday's trade, bulls tried to get back into the range, but the bottom rejected their bids, as supply overran them, pushing the shares lower for the second day. The MACD's short MA fell below its long MA, triggering a bearish call. The ROC—a momentum measure more sensitive than the more popular RSI—fell below its uptrend line and may be about to top out (red line).
The Rising Wedge's bearish posture is underscored, as it was in the form of a triple Return Move that verified the Downward-Sloping H&S top.
Based on its height, the wedge's implied target is $15 from the $110 point of breakout, targeting $95.
Failures among Rising Wedges are only 6%, making this a highly reliable pattern, statistically speaking.
Trading Strategies
Conservative traders should not trade before earnings, which can always surprise you, and even if I'm right, a volatile trade could stop you.
Moderate traders would wait for the price to rally to reduce exposure.
Aggressive traders could short now.
Trade Sample - Aggressive Short Position:
- Entry: $108
- Stop-Loss: $111
- Risk: $3
- Target: $96
- Reward: $12
- Risk-Reward Ratio: 1:4
Author note: I am not in the fortune telling business. I do not know what will happen. An analyst analyzes the evidence and reaches a prognosis. The principles of technical analysis are statistically based. In other, even if my interpretation is sound, it does not mean that the statistics will apply to this individual trade. Therefore, before you enter a trade, close your eyes and imagine you lose the trade. If you are uncomfortable with that possibility, do not enter the trade. Also, your overall performance will improve dramatically when your trading plan incorporates your timing, budget, and temperament. Until you learn how to do that, you can follow my samples for educational purposes, not for profit. Otherwise, you'll end up with neither. Guaranteed. No money back.