Google Near-Term Overbought

Google Inc (GOOG) is currently higher by a little over 28% on the year, which makes chasing the stock to upside more and more difficult, at least in the near-term.  Over the past week I have encountered a larger than usual number of inquiries regarding  the stock as last week’s announcement by the company about new and improved services got investors and traders excited about the future prospects of the company.  From a pure contrarian point of view that would a first potential indication of price exhaustion, but let’s see what the charts tell us.

If we consider the multi-year chart of Google Inc (GOOG), which looks back all the way to the company’s 2004 initial public offering, the pattern which the stock traced out off the 2009 lows does look similar to the one which ultimately led to a steep sell-off from late 2007 to late 2008…see the steepening slopes in both cases (red dotted arrows).  To be clear, I am not calling for a large correction in the stock, I am merely pointing out the steep slope of this year’s rise in the stock, which came on the back of an already steady up-trend off the 2009 lows.  What I am saying however is that the current rate of ascent in the stock is not sustainable on a medium term basis and will eventually lead to a mean reversion move, or at the very least a solid consolidation phase.

goog multi year chart

Zooming in close on a daily chart of Google Inc (GOOG), the stock’s sharp rise  off the mid April lows reveals that it now leave the stock dangling some 18% above 200 day simple moving average, which is stretched by historical measures.  To work off these overbought conditions, the stock can either tread sideways and allow for the moving average to move somewhat closer to the stock price, or the stock itself can do mean reversionists a favor and correct by a few percent, thus also narrowing the wide gap between stock price and the moving average at least to some extent.

Longer term the momentum likely remains in favor of the bulls.  However as it pertains to the near term price movements of Google Inc (GOOG), last Thursday May 16th the stock flashed us with a bearish reversal and yesterday Monday May 20th we saw a shooting star candle.  Those daring enough for a cute short-side trade can consider stops at Monday’s highs around $921.00, while folks looking at the stock from the long side will likely find better entry points lower in coming weeks.

goog daily chart






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