For almost five years, Google (GOOG) has not been able to make a clean break from the $600 price level. The weekly price chart below shows how GOOG has not yet reclaimed pre-recession prices. Even more notable is GOOG's 140%+ move from the Fall of 2008 low to the beginning of January, 2010 where GOOG once again stalled just above $600. That bounce essentially represents GOOG's entire post-recession recovery.(click to enlarge)
GOOG has not been able to break away from the $600 level for many years
Each time GOOG peaks just above $600, the subsequent sell-off has ended at higher levels. Technicians might call this pattern a rising wedge. In 2010, the sell-off low was $437. In 2011, it was $472, $480, and finally $561. This year, the post-$600 low was $565. Most recently, GOOG has bounced immediately and sharply almost every time it has nicked the magic $600 level. The daily chart shows the predictability and reliability of these bounces. I call these GOOG's "nine lives" around $600. In just the last 2 1/2 months, GOOG has tested or crossed the $600 fifteen times from a higher price point.(click to enlarge)
GOOG's interaction with the $600 level is rising in intensitySource for charts: FreeStockCharts.com
This close-up demonstrates how the tight tracking to the $600 level has caused the 50-day and 200-day moving averages (DMAs) to converge as accompanying levels of support and tracking. In particular, the 200DMA has provided firm support since a test last November.
While the recent trading action has demonstrated GOOG's resilience around $600, I think there are some clues that these "nine lives" are coming to an end soon. I labeled three important plunges this year. Each drop has delivered losses around or above 5% (5.6%, 6.9%, and 4.8% respectively). They have occurred immediately after a sharp run-up, each one with a lower high. Each plunge has taken GOOG to lower price levels. In other words, momentum is subtly starting to point downward. The last plunge was the strangest of the trio. In two days, GOOG soared from around $604 to $630. In the next two days, GOOG reversed all these gains in a nasty, high volume reversal. GOOG seems closer than ever to breaking 200DMA support and then departing from the $600 level for an extended time. A new run-up that surpasses last week's high at $638 invalidates this pattern.
While GOOG has predictably bounced from $600, I have actually been mostly focused on the bearish opposite of this predictability…the near certain drop back to $600. As GOOG rallies, I have moved in to buy put spreads. I have written several pieces describing how I have used put spreads to play a break of $600 (for example, "Surge In Volatility Makes Google Puts An Attractive Short-Term Bearish Play" and "Google's Increase In Volatility Brings Put Strategy Back Into Focus"). The basic idea is to construct a put spread with weekly options to reduce the cost of this trade. I have focused on the 600/585 put spread assuming GOOG is not likely to break below 585 on its trips toward $600. GOOG has yet to break $590 so reducing the cost of the bearish trade has been quite important in my ability to implement multiple cycles of this trade. Sometimes, I have taken profits as soon as GOOG makes its move to $600. Sometimes I have tried to wait out the sell-off. A few times I have hedged with an out-of-the-money call once GOOG trades around $600.
Now that these persistent bounces around $600 seem to be coming to an end, the reward potential of the put spread increases. While last week's reversal was particularly vicious, it may not yet be the final blow to the $600 level as the general market is currently oversold. After the bounce from oversold levels, I will be more inclined to reach for a longer-dated put spread and much slower to contemplate reaching for an out-of-money call when $GOOG returns yet again to $600. Once the 200DMA support level breaks, I will revisit this strategy and make adjustments as needed. (Note that I maintain a long-term put spread expiring January, 2013).
Be careful out there!
Disclosure: I am short GOOG.
Additional disclosure: I am short through a put spread