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Trading Primer: Short Term Confused? Zoom Out For Clarity - GOOG

Let's practice our technical analysis skills with a breakdown of GOOG. 

The first step in any analysis is to check the health of the overall market.  Below is a daily chart of the /ES.  For my purposes it is a decision chart.  It is my preferred chart to use for overall market health as it trades 24 hours a day.  During trading hours, the /ES and the SPX are virtually interchangeable within 4 points or so, so don't worry too much is you don't have access to a futures chart.

This daily chart shows me that we are working a new consolidation area.  Remember how price gravitated within the same trading box for months on end?  It was an options writer's dream as there was clear defined support and resistance The new range remains bullish as it is forming a new base from which price can move higher.  We like to see the market stairstep up or down as the stairstep represents orderly market conditions.  By identifying the trading box, and entering only at the bottom (long) or top (short) we can reduce risk with the prudent use of stops right under/over the trading box parameters.  In other words, you will know if you are wrong very quickly and it won't cost you much money to find out.  Other bullish bias studies include the bollinger bands which are still sloping upward even though they are flattening out.  This indicates a continuance of price - and looking at history it would make perfect sense for us to base here and then break out again.  For today, I give the /ES a bullish check.  Why is this important?  Because GOOG is not going to have a major sustained breakout without the overall markets moving up as well.

Moving on, let's look at the daily GOOG chart.

This is a great chart showing a very strong stock.  A couple of things bother me though.  See the candle today?  It popped and closed above the upper bollinger band.  The bollinger band complex contains 90% of all price action.  What then would be the expected result of today's action?  Right, we expect it to retreat back inside the bollinger bands.  The second thing that bothers me is the recent gap after earnings.  I'm a firm believer that gaps always fill - no matter how long it takes.  So, we have price at the top of a range with a downside gap present.  How in the world can you trade this chart right here, right now?

Zoom out to get another perspective.  This is the weekly chart of GOOG.  It's in a nice bullish formation - "W".  We are forming the right side of the W.  So while the daily chart looks pretty extended, the WEEKLY chart shows us in a nice steady uptrend with room yet to go.  What's this mean?  To me it say's buy the dips and sell the rips.  After looking at the weekly chart - another decision chart - it makes me a lot more confident to take action on the daily chart.  Viewing the weekly chart just made the daily chart ACTIONABLE!

Since we now have an actionable chart, how do we determine a price target?  We look at the price level that formed the left side of the W, and the middle side of the W.  See where they touched the same price level?  This is your first target.  We can safely trade back to the known resistance, lightening up as we near it, and then add to it again should it break above the price resistance.  I've applied the price study to a daily GOOG chart below.

By applying the price study to the daily chart, we can see where price is likely to go on a daily timeframe.  The price is determined by lining up candle high's.  This measures to $629.20.  Now considering price is currently $615, there is significant upside on the near term chart.  I expect to see a breakout to $629.25, a little rest then continued upside to our weekly target $640.  When price breaks out of its current trading range on the daily, it will first be seen on the indraday charts as a bull flag.  I'd encourage traders to be familiar with price patterns on ALL timeframes in order to identify when the flagpole starts to form.

Remember, when in doubt, zoom out.

Suz
OptionMarketMentor.com
@SuzyQ76022