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What Charts are Saying About Google's Stock

Thursday, 21 Jan 2010 | 12:25 AM ET

If you Google ‘cause and effect’ you come up with a list of millions.

It’s a complicated subject, and the relationship between the cause and effect on the Google price chart is just as complicated.

It's convenient to associate the recent price pullback with Google’s current dispute with China. However, a closer look at its stock chart would reveal other technical factors at play, including Google's well-established historical resistance level near $600.

Chart analysis doesn’t concentrate on cause and effect. That’s for fundamental analysts. Chart analysis concentrates on understanding trend strength and identifying the trigger points which indicate the balance of probability has shifted.

The weekly Google chart shows strong trend definition. The downtrend was clearly broken with a decisive breakout. The new uptrend is well defined with the uptrend line. This has been tested many times and shows good trend strength.

The trend strength is confirmed with the Guppy Multiple Moving Averages (GMMA) display. The GMMA use two groups of moving averages. The short term group shows the activity of traders. The long term group shows the activity of investors.

The uptrend price has clustered along the upper edges of the short term GMMA showing trader confidence in the trend. The long term GMMA shows steady investors support with good and consistent separation. The gap between the two groups of moving averages is also consistently wide. These are all features of a strong and sustainable trend.

The potential withdrawal from China has triggered the strongest challenge to the new up trend since it started. Traders are clearly worried by the implications and they have driven prices down to the value of the long term up trend line. For the first time in this new uptrend they have also driven prices down to the value of the lower edge of the short term GMMA. In charting terms, the price is approaching a number of significant trend points. These trigger points have the capacity to trip the price activity into a new and possibly substantial downtrend, or to reaffirm the strength of the existing trend. The chart provides the key trigger points for the bears and the bulls.

The bearish view is activated by a weekly close below the value of the uptrend line and the value of the lower edge of the short term GMMA. This is near $570. This would be the first significant break in the uptrend and signals the end of the uptrend. This is not necessarily the beginning of a new downtrend, but it is a signal that significant trend change is developing.

The initial downside target for any fall below the trend line is the historical support level near $510. This is just below the upper edge of the long term GMMA. This is an area where investors support would also be expected to stop any temporary trend collapse. The lower edge of this support area is near $490.

Compression in the long term group of averages shows that investors are also joining the selling. Under these conditions the downside is much lower, around the $420 level.

Remember, this is the bears. The bulls have a different perspective. The key for their behavior is the ability of price to rebound from near the value of the uptrend line. This is the most bullish outcome. This does not preclude a one-off weekly close below the value of the uptrend line. A rebound from the trend line must be followed by a successful retreat and retest of the uptrend line value. This confirms bullish trend strength.

The current retreat from $630 can also be seen as a reaction away from the historical resistance level near $600. In this context the recent problems with China may be the proximate cause of the price retreat, but in a longer perspective, it is consistent with the behaviour of the historical resistance level. This may be a signal for a consolidation pattern to develop near this resistance level.

This is a pause in the uptrend prior to a continuation and a successful breakout above $600. Initial, upside targets are near $700 which is moving towards the previous all time highs.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.

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