Internet content giant Alphabet Inc. (GOOGL) reported earnings on Feb. 3, beating estimates on earnings per share but missing on revenue. The stock reacted to the downside, trading as low as $1,422.03 on Feb. 4.
This put the stock midway between its annual value level at $1,408.56 and its monthly pivot at $1,444.72. Once the stock stabilized and moved back above $1,444.72, momentum took over, as Alphabet shares rallied to an all-time intraday high of $1,530.74 on Feb. 19. The stock then gave up some gains over the next two days on the spreading of the coronavirus.
Wall Street was wrongly concerned about Alphabet stock, as revenue from YouTube was 30% lower than expected. Even so, Morgan Stanley maintains an overweight rating and a $1,560 price target; Evercore has an outperform rating and a $1,600 price target; and RBC rates the stock at outperform with a $1,550 price target.
Alphabet stock is one of the members of the CATCH family, which makes it a play on momentum. Its P/E ratio is 29.41, and it does not offer a dividendaccording to Macrotrends. The stock closed last week at $1,483.46, up 10.8% year to date and in bull market territory at 51.7% above its Dec. 24, 2018 low of $977.66.
The bull market for Alphabet was not with interruptions. The stock fell by 17.8% from a high of $1,198.00 during the week of Feb. 2, 2018, to a low of $984.00 during the week of March 30, 2018. From a high of $1,291.44 during the week of July 27, 2018, to the low of $977.66 on Dec. 24, 2018, the stock fell 24%. From a high of $1,296.97 during the week of May 3, 2019, to the low of $1,027.03 during the week of June 7, 2019, the stock fell 20.8%.
The daily chart for Alphabet
The daily chart for Alphabet clearly shows the ups and downs since the low posted on Dec 24, 2018. There was a negative reaction to earnings, shown by the price gap lower on April 30. There was a price gap higher on July 26 on a positive reaction to earnings. The earnings miss on Oct. 26 was ignored.
The down-then-up volatility resulted in the formation of a “golden cross” on Aug. 12, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow. This tracked the stock to its all-time intraday high of $3,530.74 set on Feb. 19.
The close of $1,339.39 on Dec. 31, 2019, was an important input to my proprietary analytics. The annual pivot for all of 2020 is at $1,408.56. The value level for the first half of 2020 is at $1,314.17. The first quarter value level is $1,297.26. The monthly pivot for February is $1,444.72.
The weekly chart for Alphabet
The weekly chart for Alphabet is positive but overboughtwith the stock above its five-week modified moving average of $1,446.32. The 200-week simple moving average, or “reversion to the mean,” is at $1,043.53. The stock has been above this moving average for more than five years.
The 12 x 3 x 3 weekly slow stochastic ended last week rising to 87.63 up from 86.88 on Feb. 14. This was above the 90.00 at 93.93 during the week of Jan. 17 putting the stock in an “inflating parabolic bubble” formation.
Trading strategy: Buy Alphabet shares on weakness to the annual pivot at $1,408.56 and reduce holdings on strength to this week’s risky level at $1,546.59.
How to use my value levels and risky levels: The closing price of the stock on Dec. 31, 2019, was an input to my proprietary analytics. Quarterly, semiannual, and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons. Monthly levels for February were established based upon the Jan. 31 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while annual levels are in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an “inflating parabolic bubble” formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered “too cheap to ignore,” which typically is followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.