Alphabet’s postearnings drop could be beginning of downtrend: charts
What a difference a day makes when it comes to companies reporting earnings. Earlier this week, shares of Alphabet were hitting yet another new all-time high, suggesting a renewed leadership role for this leading growth name. But after a disappointing earnings release on Tuesday, the stock gapped lower to bring the uptrend phase into question. Let’s look at Alphabet using a series of technical indicators, evaluate the initial postearnings drop relative to previous price support and reflect on what further deterioration could mean for this former high-flying “Magnificent Seven” stock. When GOOGL pushed above the July 2024 high around $190, this represented a confirmation of a new uptrend phase. In the weeks following that new 52-week high, Alphabet settled into a range between the breakout level at $190 and a series of swing highs around $200. After finally breaking above the $200 level in late January, GOOGL approached this week’s earnings release in a position of technical strength. But after Alphabet announced it had fallen short of revenue targets, shares gapped lower on Wednesday to test the previous support level at $190. Wednesday’s gap lower also tested the 50-day moving average, a short-term trend barometer that often serves as a downside objective for price pullbacks within an uptrend phase. Our initial evaluation of the postearnings reality for GOOGL is a “bent but not broken” thesis, as the price is no longer making new highs but the gap lower managed to hold a key support level. It may indeed be too early to declare a failure of the current uptrend phase. If we focus on the relative strength index, or RSI, for Alphabet, we can see that the new highs in January and early February have been marked by lower momentum readings. This “bearish momentum divergence” implies that the latest all-time highs have been driven by less buying power, a pattern that often occurs at major market tops. So, while the late January breakout appeared bullish at the surface level, a deeper review of price momentum reveals that the breakout may not have been as constructive as it initially appeared. And while a breakout on weaker momentum does not necessarily guarantee a market top, I’ve learned to expect limited upside when stocks break higher on weaker momentum readings. As investors have a chance to further digest the reality of Alphabet’s recent earnings release, if GOOGL drops below price support and the 50-day moving average, we would expect further downside to the 200-day moving average around $175. A major trendline connecting the September and November lows could also serve as secondary support during a bearish trend phase. How does this analysis of Alphabet compare to the broad market conditions? What concerns me about the markets in early February 2025 is that the bearish momentum divergence for GOOGL is not an isolated occurrence. In fact, the chart of the S & P 500 index is featuring a series of bearish divergences as well. Here we can see the new high in early December when the S & P 500 finally reached the 6,100 level, and then the subsequent breakout in mid-January that took the S & P briefly above this high level. An initial review of this phenomenon could suggest a bullish market phase with the S & P 500 achieving new highs over the course of two months. But with the late-January attempt to push above 6,100, the middle panel shows that the RSI actually made a lower high. The bottom panel displays the cumulative advance-decline line for the New York Stock Exchange, a series that also confirmed a lower high going into February. Indeed, while stocks such as Palantir Technologies and Meta Platforms have driven to new highs in February, this chart shows that breadth and momentum indications for the broad equity markets remain quite subdued. Legendary technical analyst and former Top Gun instructor Greg Morris used to say “All new highs are bullish, except the last one.” Given the weakening momentum characteristics for charts like GOOGL, we may indeed have seen the last new high until a corrective move has run its course. David Keller, CMT marketmisbehavior.com DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
