12.23.2022
To better prepare ourselves to profit from the next life-changing uptrends, we are going to follow GOOGL, bar-by-bar on a weekly chart, from its 2020 breakout until the chart warned us that something had changed at the start of 2022. Read on. Let's follow the trend in Alphabet together.
THE BIG PICTURE
When trying to be the best one can be, studying and practicing are remarkably effective tools. My official-unofficial mentor, David Keller CMT, is an incredibly insightful trend-follower. David shared a video walking us through the chart of Alphabet, ticker symbol GOOG, in which he illustrates Alphabet’s up trend throughout 2021. He then walks us through how it completely morphed into a downtrend come 2022. I highly recommend you watch his video by clicking this link. Please know, this article is inspired by David’s video and his sage advice to study and learn from this chart ourselves.
THE DETAILS
Trends start by emerging from bases or trading ranges. The first chart below shows us when GOOGL finally broke out of its base, just 6 weeks after teasing us with a premature breakout. After closing above $77, an entry at the next open is shown with a green line labeled Initial Entry. We can round the fill price to $79. The horizontal red line below price highlights the last swing low and one appropriate area for our initial protective-stop. An entry at $79 with a stop at $68 gives us an $11 risk per share. Taking on 2% risk with a $100,000 account would afford us 181 shares.
The breakout itself, the second to last candlestick on the chart, was not perfect. It had positives and negatives. The candle itself did gap up and over $77, but it did not close at its high. Momentum, as measured by RSI, failed to rise into overbought territory above 70. GOOGL’s relative strength, against the S&P 500, also failed to print a new relative high, but it did rise with price and recapture its 40-week moving average.
GOOGL Weekly. Chart 1. Click to enlarge.
2 weeks later, the chart below shows us price printed a beautifully bullish bar. Relative strength confirmed the price high, and momentum was improving. The week closed at $87.99. This offered an unrealized gain of more than $1,050 in just two price bars.
GOOGL Weekly. Chart 2. Click to enlarge.
Price spent the next 10 weeks consolidating before breaking out to another high near $94.50 as shown in the chart below. We now had an unrealized gain of more than $1,800. Risk was getting large with our initial stop still at $68, now $26.50 from the current price. This meant it was possible to lose all of our unrealized gains and our initial risk. Moving it up would have felt important at the time, but move it to where? Price had not come back and tested its breakout level, so moving it to breakeven would have taken us out of the trade had price come back to test $77. The 40-week moving average was above the breakout level as well, disqualifying it too. Perhaps taking profits on half, or more, had price fallen below $83 would have been a good strategy.
GOOGL Weekly. Chart 3. Click to enlarge.
Based on the last chart, this would have been an opportunity to increase our position size on the next open. We would have doubled our position and added another 181 shares. This addition is marked by the green line labeled First Addition on the chart below. Let’s round our fill price to $95.50. The week started with price gapping up and then fading to close back below the breakout level, but not significantly below it. There was also a small shadow underneath its real-body, showing us buyers did step in and price closed above its lows and its 10-week average. It is noteworthy that RSI did not become overbought on this breakout.
GOOGL Weekly. Chart 4. Click to enlarge.
The next week printed the largest and most bullish candle of the entire move yet. At the same time, we saw the RSI finally flash an overbought reading. Relative strength also confirmed price with a new relative high. That was the time to raise the trailing stop to the last swing low around $82. That massive bar and new high led to 8 weeks of price consolidating into its 10-week average. GOOGL then printed another breakout high. This high was again accompanied by an overbought RSI reading and a new relative strength high. With price near $113.50, we had an unrealized gain of almost $6,200.
GOOGL Weekly. Chart 5. Click to enlarge.
The bar following the breakout bar above, we added another 181 shares on the open. This addition is marked by the green line labeled 2nd Addition on the chart below. After our 2nd addition, price moved higher for 3 weeks, threw back to test the $108 area, and then ran straight up for 4 months. After the test around $108 in May, we raised the stop to $104.
September 2021 saw price begin to consolidate around its 10-week moving average. We then raised our stop again to $115 in mid-September. With price now near $137.50, we had an unrealized gain of more than $14,800 with a risk of just about $8,000. Everything looked great from a purely technical perspective. Price was consolidating just below an all-time high. RSI was working off its overbought condition. Relative strength was moving sideways above its rising 40-week moving average.
GOOGL Weekly. Chart 6. Click to enlarge.
The next chart adds just 2 weeks of price action. We had another close above a breakout level. This was followed by a 2nd close above the breakout level, which is bullish for the most part. Flashing a message of caution though, the candle had a very small real body; It did however close above the breakout level and towards the top of its range.
GOOGL Weekly. Chart 7. Click to enlarge.
The next chart adds 3 more weeks of price action through November 26th, 2021. This is when things got interesting. Price closed back below the breakout level. This had happened to us in the past right after our 1st addition, but this time momentum was flashing a negative divergence. The RSI did not confirm the price high. Relative strength still looked strong, but it did not confirm the price high either. Looking back with perfect clarity, it is easy to say take profits here. In real-time though, its hard to imagine being alarmed by this chart
GOOGL Weekly. Chart 8. Click to enlarge.
Rolling price ahead 5 more weeks brings us to the end of 2021. The chart below shows price was sitting very close to an all-time high. Both moving averages were sloping upwards. The RSI continued lower, but of course it did; price had been moving sideways for 10 weeks.
GOOGL Weekly. Chart 9. Click to enlarge.
Moving forward another 3 weeks, the technical picture had changed. The challenge would have been accepting and adjusting to this new information in real-time. The new information was the following:
This was the longest lasting consolidation since the initial breakout.
This was the first-time price had closed below its 40-week moving average since the initial breakout.
The RSI remained bullish in its range above 40, but it closed below 50 for the first time since the initial breakout.
The relative strength line confirmed the price weakness and closed below its own 40-week moving average.
$130 had become the level to watch. Closing below $130 would be a signal that the series of higher-highs and higher-lows had been broken for the first time since our initial entry in October of 2020.
GOOGL Weekly. Chart 10. Click to enlarge.
The chart below shows us the next 12 weeks. Price threatened to close below $130 several more times, and finally did so in April of 2022. That would have stopped us out and closed our position. When all was said and done, we would have captured a gain of $12,100, an increase in our $100,000 account of 12%, over roughly 78 weeks. That is an almost 36% return-on-investment.
GOOGL Weekly. Chart 11. Click to enlarge.
THE SUMMARY
Managing our risk and selling out on that breakdown below $130 turned out to be the right thing to do. Could we have known that for sure at the time? No. Could price have broken above $150 and continued higher? Of course it could have. In that case we would have taken a new position if the technical conditions told us to do so.
Now that we've seen price unfold bar-by-bar, let’s zoom out and take a look at an up-to-date price chart. We want to see how price rotated from bullish to bearish. Looking at the full chart below, we can see a few important technical details:
2021 showed us price above 2 upward sloping moving averages.
Momentum was continually overbought and never broke below 40.
Relative strength was also continually rising above its own rising moving average.
2022 showed us the exact opposite conditions:
Price was below 2 downward sloping moving averages.
Momentum stayed below 60.
Relative strength was continually falling and below its own falling moving average.
GOOGL Weekly. Click to enlarge.
The great Marty Zweig's first rule states "The trend is your friend," and his lesser quoted ninth rule is "Don't let your opinion of what should happen bias your trading strategy." In that spirit, It is my sincere hope that walking through Alphabet’s late 2020 and 2021 trend was a helpful exercise which will ultimately improve the way we manage our big winners in the future. Stick to the facts and maintain an objective situational awareness, follow the trend, and manage your risk.
As always, thank you for reading. Please reach out with any feedback or comments. I would love to know if you agree, disagree, or don't care at all. Louis@eastcoastcharts.com
This article is for educational and informational purposes only. The author may or may not have a position in the securities mentioned. Read our full disclaimer here.
Commenti