Alphabet Inc. (GOOGL) stock has now completed a breakout above the February high near $1,500 and could trade above $2,000 in coming weeks. It’s the last member of the CATCH quintet to hit new highs, restoring the leadership mystique of these Nasdaq 100 mega-caps. Even so, Alphabet remains vulnerable to cyclical forces, driven by a strong dependence on advertising revenue that has taken a hit due to the COVID-19 pandemic.
- Alphabet stock broke out to a new high at the end of August and could trade above $2,000.
- The rally has now reached five-year resistance above $1,700.
- Profits and revenues are highly dependent on economic cycles, due to heavy advertising exposure.
The stock market is “pricing in” a full economic recovery in 2021, but that might not be in the cards, given persistently high unemployment and recent surveys that indicate many small businesses won’t survive in the next 12 months. Alphabet advertising income relies on these smaller operators, which pay to improve their Google search placement. As a result, momentum buyers could easily get trapped in a reversal that sheds hundreds of points.
Wall Street consensus reflects little or no caution, with a “Strong Buy” rating based upon an incredible 30 “Buy” recommendations and just 2 “Hold” recommendations. No analysts are telling shareholders to sell positions and move to the sidelines at this time. Price targets currently range from a low of $1,500 to a Street-high $1,990, while the stock opened Thursday’s session just below the median $1,760 target.
Some big investors have been walking away, despite Wall Street’s relentless table-pounding. Hedge funds run by Stanley Druckenmiller, Seth Klarman, and David Tepper have decreased position size in the past month or two, highlighting growing concerns about valuation following a 700-point advance off March’s 52-week low. Their risk containment reinforces a mixed outlook that needs an effective COVID vaccine, even though pharma is still conducting trials.
Alphabet Long-Term Chart (2013 – 2020)
Alphabet completed a major breakout above the 2007 high at $374 in early 2013 and stalled above $600 in 2014. It broke out once again in the summer of 2015, carving a powerful advance that tracked a rising highs trendline (red line). A January 2018 reversal at that barrier triggered a decline through $1,000, establishing a horizontal trading floor that was tested in December 2018, June 2019, and March 2020.
The stock completed a V-shaped pattern into the February 2020 high at $1,531 in July and broke out at the end of August, establishing a measured move target just above $2,000. However, the rally has now reached the five-year rising highs trendline, raising the odds for a reversal that could test breakout support. Conversely, a buying surge above $1,800 would signal a trendline breakout that forecasts much higher prices.
Trendlines are easily recognizable lines that traders draw on charts to connect a series of prices together or show some data’s best fit. The resulting line is then used to give the trader a good idea of the direction in which an investment’s value might move.
Alphabet Short-Term Chart (2018 – 2020)
The on-balance volume (OBV) accumulation-distribution indicator fell to a 16-month low in January 2019 and entered a modest accumulation phase that topped out with price in February 2020. The pandemic decline did little damage, dropping OBV into January support while price hit a 15-month low. OBV broke out in May and stalled in July but hasn’t hit a new high since that time, setting off a bearish divergence that could undermine the uptrend.
Taken together with Thursday’s weak action at trendline resistance, sidelined investors may wish to proceed with caution because a lower-risk buying opportunity might come closer to the 50-day exponential moving average (EMA), now rising through the breakout level. Of course, all bets are off if Alphabet surges above resistance because that event would indicate unusual strength, setting the stage for upside well above the measured move target.
The Bottom Line
Alphabet stock broke out in August but has now traded into strong resistance above $1,700, raising the odds for a pullback that could offer a lower-risk entry.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.