Will Buyers Step in for Google (GOOG)?

02/11/2010 12:01 am EST


Nick Perry

Equity Options Trader, Schaeffer's Investment Research

Google Inc. (GOOG) is one of the premier bellwether stocks. To say the company's name is widely known is an understatement, and the equity rebounded from the bear market slide with gusto. It is this lofty status that makes the stock one to watch for two reasons. The first is the obvious potential for those who want to trade it. The second is as a tool for gauging the overall demand and interest in the market.

In particular, I am referring to the comments made about the oversold readings that were recently hit. As the daily chart below shows, the current pullback broke the steady uptrend that had been in place since March. The drop pushed the Relative Strength Index (RSI) to levels not seen since before the bottom. While a break of an uptrend can be a warning sign, the first break can also offer a good buying opportunity. With the shares now emerging from oversold readings, we can use this to gauge whether buyers still have an appetite for stocks.

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As far as watching the stock as a possible trade, that demands checking into the sentiment.

For some time, my primary apprehension has been analyst ratings on Google. With 31 of 35 analysts (89%) ranking the stock with a buy rating, it doesn't seem like there is much margin for error.

Of course, it is important to point out that analysts have been firmly in the buy camp for the last few years.

In other words, while this is a concern to note, this optimism alone isn't enough for me to act on. Google is what I call a “story stock.” Even during the bear market slide, when I thought the tide was about to turn, analysts held tight.

A look over the other indicators below also suggests optimism is the dominant emotion. However, that is the nature of story stocks. They generate buzz and the revelry continues as long as the stock holds up. That is what makes this current pullback worth watching. For those who have already bought, this is the first major test of their conviction.

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Last Friday's intraday low near $522 is the level to watch going forward.

By Nick Perry of Schaeffer’s Trading Floor Blog

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