Google's stock goes vertical
Global technology giant Google Inc (GOOG) yesterday held its developers' conference in San Francisco. The company announced a flurry of new initiatives and updates to services, which seemed to impress investors judging by the stock's reaction. In terms of new products, the company announced plans to start a subscription music streaming service in a bid to gain more Android users and in direct competition with other streaming music services such as Spotify. Google shares rallied 3.25 percent on the day and by so doing reached yet another all-time high, piercing the USD 900 mark. Year to date, the stock is now higher by 29.48 percent, which compares rather positively to the benchmark S&P 500 (higher by 16 percent year to date), of which Google is a component.
Looking at a chart of the stock that spans all the way back to the company's initial public offering in 2004, I currently see a similar pattern in play that we saw in 2004 through to 2007. Namely, a steep rise in the stock over a multi-year period that eventually took a vertical leap and thus exhausted buyers. The below chart shows that since the stock's late 2008 lows, which, might I add, came a few months before the lows in the S&P 500, it again staged an impressive rally right into present day. Note, however, that the slope of the increase has steadily steepened, especially over the the past few weeks.
Now, for the more trading-oriented folks, let's dig a little deeper and do a close-up on the daily chart of Google. As Newton's first law states: "An object in motion remains in motion, and at a constant velocity, unless acted upon by a force." By this rule, leaning against the recent sharp rise in Google's stock price is not yet a high probability bet.
On the other hand, as I so often point out, stocks that take an already steep slope and turn it vertical are eventually prone for a corrective move, or better said, a mean-reversion move. That's not to say that Google's stock price has to fall dramatically, but an upward acceleration at the current rate is most likely not sustainable over an extended period of time. Mind you, the stock is currently trading roughly 19 percent above its 200-day simple moving average, which, by historical standards, is well extended. Thus, buying up here for anything more than a momentum scalp is simply not the best medium or long-term entry point. At the same time, despite the currently stretched chart, the stock continues to trade in an orderly fashion. It did, for example, correct to a technically solid support zone in mid-April before kicking into rocket launch gear.
Investors looking to add Google to their portfolio are likely to find somewhat more discounted prices in the coming weeks. Traders looking for a mean-reversion move and thus short the stock would be best off waiting for a clear bearish one-day reversal to signal an immediate term overbought state, which would then also give them a clearly defined stop-loss level to lean against.