Friday, January 20, 2012

GOOGle's stumble: A post-mortem

Google Inc. (GOOG) stumbled big time at the open after missing a revenues projection.

How bad is it on the chart? What were the warning signs?

Amusingly, in light of all the OMG LOL GID* chit-chat that followed the downward gap, from Thursday's close of $639.57 to today's open of $590.53 -- a decline of 7.7% -- GOOG has yet to set to set a new lower low in the rise that began in early October 2011.

A lower low would require a drop below the Nov. 25, 2011 low of $561.33.

So from a chart standpoint, it's not the end of the world. Subsequent moves may indeed prove to be apocalyptic, but GOOG isn't there yet.

And today's move should not have come as a total surprise. The chart showed signs and symptoms that something was amiss.

The price peaked, most recently, at $670.25 on Jan. 24. That day was followed by three trading days of wide intra-day declines that brought the price down to a low of $616.91 on Jan. 10. The decline overall was 8%.

The price then spent four days in a sideways pause -- a balance between buyers and sellers of the shares -- and then on Thursday gapped up on high volume, fell back into the prior day's range, and then retraced upward, forming a candlestick pattern called a hanging man, signalling a top reversal.

If I had been daytrading on Thursday, I might have initially treated the move as a breakout and bought shares, but I would have sold them late in the day as I saw the hanging man developing.

And frankly, I doubt that I would have played the breakout. The prior multi-day decline of 7.7% is large, and I'm usually reluctant to play counter such trend on the basis of a single day's move, especially when the preceding sidewinder was only four days.

(At least with stocks. I might have taken it on a currency pair, where trends tend to be more stable and breakouts more reliable.)

At any rate, the lesson for traders is a banality from the old TV police drama Hill Street Blues: "Be careful out there."

And more banalities from me: Keep your wits about you, and keep your eyes on the chart.
* Google is Dooooomed!

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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