Alphabet Inc. (GOOGL) missed earnings per share (EPS) estimates after the closing bell on April 28. The stock gapped higher on April 29 and then pulled back slightly. Weakness into May 4 held its semiannual and quarterly pivots at $1,314.17 and $1,301.83. Strength on Friday is shy of its annual and monthly risky levels at $1,408.56 and $1,420.76.
The company behind the internet's leading search engine has missed on EPS in two of the past four quarters. The stock is not cheap, as its P/E ratio is elevated at 27.63 without offering a dividend, according to Macrotrends.
Alphabet stock closed last week at $1,384.34, up just 3.4% year to date and in bull market territory at 37.2% above its March 23 low of $1,008.87. The stock is 9.6% below its all-time intraday high of $1,530.73 set on Feb. 19.
The daily chart for Alphabet
The daily chart for Alphabet shows the formation of a golden cross on Aug. 12, when the 50-day simple moving average rose above the 200-day simple moving average. This buy signal indicated that higher prices would follow. This tracked the stock to its all-time intraday high of $3,530.73 set on Feb. 19.
Alphabet shares saw a huge price gap lower on Feb. 24, which pushed the stock below its 50-day simple moving average. The stock then failed to hold its annual pivot at $1,408.56 on Feb. 26. Alphabet then gapped below its semiannual pivot at $1,314.17 on March 6. The 200-day simple moving average gave way on March 11 as the stock plunged to its March 23 low of $1,008.87.
The V-shaped recovery had the stock back up to its 200-day simple moving average at $1,270.22 on April 14. Then came the price gap higher on April 29 on the positive reaction to earnings. Note how the semiannual and quarterly pivots at $1,314.17 and $1,301.83 held on the pullback. The nearby upside potential is to the annual and monthly risky levels at $1,408.56 and $1,420.76, respectively.
The weekly chart for Alphabet
The weekly chart for Alphabet is positive, with the stock above its five-week modified moving average at $1,284.00. The stock is also above its 200-week simple moving average, or reversion to the mean, at $1,071.88. Alphabet tested this average on weakness during the week of March 20 as a buying opportunity at $1,053.72.
The 12 x 3 x 3 weekly slow stochastic reading rose to 47.78 last week, up from 47.78 on May 1. Just before setting the February high, this reading was above 90.00, putting the stock in an "inflating parabolic bubble" formation. The bubble popped, and a bear market decline followed.
Trading strategy: Buy Alphabet shares on weakness to the semiannual and quarterly value levels at $1,314.17 and $1,301.83, and reduce holdings on strength to the annual and monthly risky levels at $1,408.56 and $1,420.76.
How to use my value levels and risky levels: The closing prices on Dec. 31, 2019, were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.
The second quarter 2020 level was established based upon the March 31 close, and the monthly level for May was established based upon the April 30 close. New weekly levels are calculated after the end of each week, and new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while annual levels remain in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.