Although the desire in trading is to reduce the complexity to something we can get our arms around, it isn't all that easy to do. One methodology that you see time and time again is to use one or two stocks, or even a handful as a proxy for the general market - a tell if you will about where things are headed based on where the proxies go.
Back in the middle of May I penned a piece promoting Google (NASDAQ:GOOG) as a potential market tell. The idea was simple enough. Google is one of the three largest weighted technology stocks in the NDX 100 with the three combined comprising a weighting of roughly one-third of the entire 100 stocks that make up the index. Unlike Apple and Microsoft, Google's revenue base is heavily dependent on advertising and thus is much more closely aligned with the health of the economy.
The company is ubiquitous and has even become part of the common language since we all "Google" it when searching for information. The breath of projects is staggering and though most still feed the core advertising revenue streams, more and more we are seeing tangential forays into far flung ideas like driverless cars and balloons delivering Internet access.
On the flip side, unlike its big cap brethren, Google has maintained an independence that is unlike most companies where the founders still heavily influence the long term vision of the company without the need to answer to the almost suffocating Wall Street quarterly penance payments that have become overly stifling to so many. That degree of independence results in a greater degree of volatility which can result undermine the market tell aspects we seek to attribute to it.
So if we make the leap of faith and accept Google as a market tell, then what exactly does it tell us?
Fundamentally Google continues to deliver double digit earnings and revenue growth but there are others who can bisect and dissect the fundamentals far better than I. My strength is the technical side of the house using neoclassical TA which is a model I developed over the years that seeks to locate and interpret supply and demand on the charts.
So, what does the neoclassical TA view of Google tell us? First off, neoclassical TA is about examining the charts across the three time frames; long, intermediate and short term? The following is a visual device I created to get a quick technical health check on a given stock. I call it the Trading Cube and it quickly provides a view of the qualified trend and mean-time-to-failure (OTC:MTTF) probabilities for a stock, the stock sector and general market all at a glance.
The Trading Cube acts like an accountant's balance sheet giving you a quick assessment of the stock's technical health at a moment in time.
In this particular snapshot, GOOG has been in a sideways trend a very long time (note the 98.5% MTTF reading on the short term time frame in the cube for Google) and is suspect bullish on the intermediate and long term trends. In neoclassical thought, a suspect trend has a higher probability for failure than a confirmed trend. The degree of that probability varies with the type of trend and the time frame and is measured through the MTTF readings. The qualification is a straight comparison taken when a stock's trend transitions by comparing the volume associated with the bar doing the breaking as compared to the bar being broken. Higher volume shows greater confidence and thus is confirmed. Less volume is a weaker prospect and is termed suspect.
From this same snapshot we can see that the sector and the general market share the bullish tone on the longer term time frames yet they are currently experiencing difficulty (a sideways trend) on the short term time frame.
Thus, overall the snapshot view for Google is quite positive and if we turn to the charts which the Trading Cube is based on, we can see more clearly why this bullishness is evident.
On a long term basis, Google has risen from the depths of the 2008 lows to the most recent highs and it has done this in a manner that any investor would want; in a stair-stepped mechanized fashion of bullish ABCD patterns. The current pattern measures to just over $1010 and so far there isn't anything to suggest a halt to the move higher on this time frame.
Shifting to the intermediate term view, the neoclassical anchored resistance zone appears at the intersection of the highs from the weeks of May 13 and May 20. Those highs denote resistance because each bar is a swing point, a high volume or wide price spread bar relative to all other bars. Anchor bars, when combined; create anchor zones - areas on the chart of significance and that's what you see here at the top of the chart. That area becomes a measuring stick for all future price activity.
To get over that price area buyers will have to be willing to pay up and paying up is a hard thing to do unless you have confidence that higher prices are yet to come. That is the value in understanding where supply and demand should show up. They give you benchmarks to either trade or measure against.
With earnings just a little more than a week away, Google is set-up to test those highs and potentially break through them. It typically moves $30-$50 on earnings so if a breakout is indeed imminent, then the general market is likely to follow.
Finally, switching to the short term time frame, here the picture is not as bullish. The short term time frame is always the most difficult time frame to trade in isolation because it has the greatest amount of noise.
A small bullish ABCD just completed (not annotated) as price entered into the anchored resistance zone. Google moved into a range trade set-up a full week before the general markets did back in the middle of May. It was a good tell. It is failing at anchored resistance currently but with earnings just around the corner, it is likely to hold up here in this general area until earnings either upsets the short term cart or propels the stock to new highs.
Given that projections on the long and intermediate term are for higher prices, you have to defer to a bullish stance on Google and thus the general market as well. Both are telling us the same thing and that is that there has been near term turbulence and price congestion but the longer term picture remains staunchly bullish. Thus, if you are leaning long on Google and the general markets, then the winds remain at your back.
Disclosure: I am long GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.