As a long-term trend-follower, my goal is to identify stocks that are demonstrating signs of accumulation and to follow the uptrends as long as possible. But it also means I am always looking for stocks that are showing short-term weakness within a long-term uptrend, as that can often mean ideal entry points to reengage with a top performer. In the case of Alphabet Inc.
(GOOGL) , we see price approaching a "confluence of support" where multiple technical indicators agree on a particular price range. This could mean that GOOGL is approaching a buyable point within a long-term uptrend, while also giving us a clear stop signal in case the short-term downtrend continues. While Alphabet has been in a primary uptrend since the end of 2023, there have been a number of fairly significant drawdowns of over 10% along the way.
So while the recent pullback of about 19% has meant plenty of short-term pain for shareholders, it's been a fairly common occurrences over the past 18 months. On the most recent pullback into a March low, GOOGL shed about 15% before reaching its 200-day moving average. Within a week of bouncing off the 200-day, we saw a buy signal from the PPO indicator, confirming a positive trend rotation.
There was a similar PPO buy signal in November of last year, soon after the October low. In both cases, a break back above the 50-day moving average served to confirm a return to the long-term uptrend phase. Back to the current price action, Alphabet is close to testing its 200-day moving average once again, and the PPO indicator is close to generating a buy signal.
The bull case from here would mean GOOGL finds support around current price levels, we observe a buy signal from the PPO indicator, and the price pushes back above the 50-day moving average to complete the rotation. What else can we use to validate potential support around current price levels? Let's review how recent price action lines up with Fibonacci retracement levels based on the 2023-2024 uptrend. Taking a longer-term view to start, we can use the major low from November 2022 as well as the recent high in July 2024.
A 38.2% retracement of that long-term uptrend yields an initial downside target around $150, just below the 200-day moving average. We can also look at a shorter time frame, using the March 2024 low and the July 2024 high.
This Fibonacci framework indicates an initial downside target around $168, and then a 61.8 retracement level around $154. This last downside objective lines up well with the 200-day moving average as well as the recent swing low in early August.
What would tell us that the short-term downtrend for GOOGL is not bottoming out as expected? A break below $150 would invalidate the Fibonacci retracements, and also would confirm that the 200-day moving average did not hold. The PPO indicator would most likely not generate a buy signal in that scenario, and savvy investors should reassess the "long-term uptrend" thesis for this leading growth stock. By combining trend-following tools like moving averages and the PPO indicator along with price objective analysis using Fibonacci retracements, we can start to anticipate when and where a potential trend change could occur.
But the best part is that these techniques can also provide clear exit strategies for when short-term pullbacks evolve into long-term downtrends. -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.
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