Alphabet, Inc (Google) Class C (NASDAQ:GOOG) was plunging more than 6% lower in sympathy with a number of other social media-based and technology stocks after Snap, Inc (NYSE:SNAP) posted disappointing second-quarter earnings on Thursday after the market close.
The bearish price action was likely accelerated when Mizuho analyst James Lee cut Alphabet's price target by 14%.
The move lower caused the stock to confirm Alphabet is now trading in a downtrend pattern, within a rising channel.
A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart.
The lower lows indicate the bears are in control while the intermittent lower highs indicate consolidation periods.
Traders can use moving averages to help identify a downtrend with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term downtrend.
Descending longer-term moving averages (such as the 200-day simple moving average) indicate a long-term downtrend.
A stock often signals when the lower low is in by printing a reversal candlestick such as a doji, bullish engulfing or hammer candlestick. Likewise, the lower high could be signaled when a doji, gravestone or dragonfly candlestick is printed. Moreover, the lower lows and lower highs often take place at resistance and support levels.
In a downtrend the "trend is your friend" until it’s not and there are ways for both bullish and bearish traders to participate in the stock:
- Bearish traders who are already holding a position in a stock can feel confident the downtrend will continue unless the stock makes a higher high. Traders looking to take a position in a stock trading in a downtrend can usually find the safest entry on the lower high.
- Bullish traders can enter the trade on the lower low and exit on the lower high. These traders can also enter when the downtrend breaks and the stock makes a higher high indicating a reversal into an uptrend may be in the cards.
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The Alphabet (GOOG) Chart: Alphabet confirmed a new downtrend on Friday, when the stock fell below the most recent higher low of $109.30, which was printed on July 18. The most recent lower high was printed on July 20 at $116.33.
- Alphabet may find support at the lower ascending trendline of the rising channel, which the stock began trading in on May 24. When Alphabet tested the trendline on May 25, June 17 and July 5, the stock bounced up off the level.
- If Alphabet is unable to hold the lower trendline as support, a larger move to the downside could be in the cards.
- Alphabet is trading below the eight-day and 21-day exponential moving averages (EMAs), with the eight-day EMA trending below the 21-day, both of which are bearish indicators. The stock is also trading below the 50-day simple moving average, which indicates longer-term sentiment is bearish.
- Alphabet has resistance above at $111.50 and $117.23 and support below at $106.53 and $101.08.
