When Alphabet (GOOGL) released its Q1 earnings in April, it beat estimates and announced a massive share buyback.
But it closed out the day trading on its lows. And it got stuck inside a short-term sideways pattern.
That all changed in May.
We’ve seen a rush into Big Tech almost reaching panic levels. And GOOGL has rallied 25% during the past month alone.
When we last checked in on GOOGL on May 25 (second red arrow in the chart below), it was right in the thick of that rally.
And despite showing signs of overheating, GOOGL managed to rise to new highs.
So today I want to see what’s coming next…
Losing Momentum
In the chart below, the 50-day Moving Average (MA, blue line) shows how GOOGL transitioned from a downtrend to an uptrend in the first quarter of this year.
Yet the 10-day MA (red line) shows that there have been plenty of countermoves along the way…
Alphabet (GOOGL)
Source: eSignal
After an initial false start in January, GOOGL’s current rally got underway in March. That move higher coincided with two bullish signals…
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The Relative Strength Index (RSI) broke through resistance (green line) and gained traction in the upper half of its band. (That’s where the RSI has remained throughout GOOGL’s rally.)
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The 10-day MA broke above the 50-day MA and began accelerating higher. Both MAs also tracked higher.
But the 10-day MA has been flattening out over the past couple of weeks. It hints that GOOGL’s uptrend is losing momentum.
The other thing you’ll notice is the action of the RSI…
Take another look:
Alphabet (GOOGL)
Source: eSignal
While GOOGL has been making higher highs (upper orange line), the RSI has been making lower highs (lower orange line). And the RSI has peaked in overbought territory (upper grey dashed line).
When momentum is steadily falling like this, it becomes increasingly difficult for a stock to hold a price level – let alone rally.
Eventually, the lack of buying momentum will let sellers gain the upper hand, which pushes the stock price lower.
The RSI could soon retest support (green line). And what happens here will be key.
So what am I looking for next?
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Holding Support
Back in late April to early May, the RSI tested and held support.
That support level held despite GOOGL’s Q1 results decidedly underwhelming the market.
When buying momentum returned, the RSI’s rally pushed GOOGL up to its recent highs.
If the RSI repeats this pattern now, then that could provide the base for GOOGL to resume its rally.
We’d then look for the 10-day MA to begin accelerating above the 50-day MA again as confirmation of any longer-term up-move.
However, I’m focusing on the immediate action around the RSI right now…
If the RSI breaks through support and the 10-day MA starts to roll over, then the current retracement off GOOGL’s June 7 high ($129.04) will likely continue.
A move below $120 could then be in the cards.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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