Momentum remains on the side of technology giant Google (GOOG) despite the large gains already made in 2013. Following a big post-earnings rally in mid-October, the stock consolidated and is forming a tight bullish wedge pattern. This offers traders another juicy long-side breakout trade.
Tight patterns often lead to quick moves. A break to new highs would keep the momentum on the side of the bulls, while any break below the consolidation pattern would be equally bearish and serve as an automatic stop-out area.
The company reported third-quarter results after the close on Oct. 17, beating analysts' estimates on all fronts. Earnings per share (EPS) were up 19% to $10.74 from the same quarter a year ago, beating estimates of $10.34 by a good margin. Revenue was up 12% to $14.9 billion, slightly better than the consensus estimate.
As a result, the stock exploded higher on massive volume on Oct. 18, and it has not looked back since. GOOG shareholders are no strangers to good-sized post-earnings moves, but the 13.8% rally was larger than usual, and it took the stock above $1,000 for the first time, setting a new all-time high.
GOOG is up 43% year to date, and while displaying a steep slope and medium-term overbought levels, stocks in this type of pattern can continue higher for longer than many can stay short. Because we always need to consider both sides of the coin, however, I would be remiss not to mention that if a bearish reversal were to occur, it should be respected.
From more of a structural point of view, the broader U.S. stock market, as measured by the S&P 500, is higher by about 24% this year. Many institutional investors remain under-invested and most likely are underperforming the market.
Despite the fact that some mutual funds are closing the books for their year on Oct. 31, most funds are open for business until the end of the calendar year and are looking to buy dips or chase breakouts.
Keeping this in mind, and also noting that GOOG offers good trading volume, plenty of institutional research coverage and is playing in an industry with lots of growth potential, we have a stock that has a natural bid at least in the medium term.
Also, in a trend-following situation as is currently the case for many institutional and individual investors in GOOG, momentum oscillators can remain "overbought" for a long time, making them fairly irrelevant. What would be noteworthy and make me more cautious is negative divergence between the stock's price and momentum oscillators, which is not yet the case.
Moving on to the daily chart, GOOG held its 200-day moving average in early October, and with the post-earnings rally, broke out of a multi-month consolidation phase. The fact that this rally came out of a solid base rather than a steep slope further supports the bullish case.
In the past two weeks since the earnings announcement, the stock has formed a tight consolidation pattern, a break above which could easily push it 5% higher in the short term.
Recommended Trade Setup:
-- Buy GOOG on a break above $1,035
-- Set stop-loss at $1,010
-- Set initial price target at $1,090 for a potential 5% gain in 2-4 weeks