Friday, July 28th, 2006
Google flashing signals
TraderMike had an excellent look at the chart of Google and other internet stocks. While he is leaning towards being bearish, he rightly points out that it could go either way. But as we can see in the chart there are some bearish signals.
Firstly, Google broke its upward sloping trendline. That isn’t necessarily a sell signal as the stock is still technically making higher highs and higher lows, so is still trending up. The worrying thing is that after hitting a new high and correcting, the subsequent two rallies have failed to breach that previous high.
That sets up a classic reversal pattern. Victor Sperandeo ‘Trader Vic’ dubbed it the 1-2-3 top. That’s where a stock reaches a new high then falls back creating a ‘trough’, or resistance, area. The next rally fails to break the last high and a sell signal is given when it falls below the trough.
Google would give a sell signal if it fell below the level it corrected to (around 325) immediately after its all-time high. Some investors may sell when it falls below 350 as would have then had a mini 1-2-3 reversal.
Another bearish signal is that Google beat estimates, but the stock failed to make big gains. Is all the good news priced in?
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