Monday, May 30, 2005

Google' Next Reaction

In a previous post I projected a 376 target for Google by the end of 2005. I think that public sentiment towards GOOG has been warming up but the speculative pot has definitely not yet come to the boil. Since I expect the Nasdaq and the S&P to rise quite a bit by the end of the year my 376 target for GOOG may well prove too conservative.

In any case how does one "handle" a stock like GOOG that is moving dynamically upward but is still far from a reasonable price target? In this kind of situation I want to be long and normally would not touch a long position in a stock like GOOG unless I've got good evidence that the uptrend from the IPO price of 85 is over.

But some people can't resist showing the world how smart they are and will try to sell part of their long position when a reaction seems imminent and buy it back when the reaction appears complete. How could one implement this tactic in GOOG?

The daily chart above shows my estimate of the 40 point price boxes in GOOG. The first thing to observe is that GOOG has already had two reactions on the way up one of 40 points and one of 44 points. So the next time GOOG drops about 40 points I would say that it is a strong buy. In fact, since the market is in an acceleration phase I might not even wait for the full 40 point reaction to develop but would look for a more aggressive entry after a reaction has carried 30 points and reached the 1/2 point or the top or bottom of a box.

Where might the next reaction start? Frankly, this is the hardest question to answer in speculation and I get this wrong as often as I get it right. This is why I don't like to disturb investment positions if my longer term target is still far away and if the broader market is still headed higher. In any case, let me take a stab at an answer for GOOG.

The biggest reaction in GOOG so far was 44 points from 216 to 172. The preceding move up in GOOG was 131 points from 85 to 216. If we add 131 points to the low of that reaction at 172 we get a target of 303. Notice that 302 is the 1/2 point of a price box and that the last reaction carried from one such 1/2 point to another. So my guess is that this pattern will continue and that the next reaction will start near 302 and perhaps carry as far as 262.

There is one other pattern which suggests that resistance will be found near 300. Note that 212 is 2 1/2 times the offering price of 85 and that the biggest reaction so far started from a level 4 points higher. If the next reaction starts from a level 4 points above the price which is 3 1/2 times the offering price it will begin from 301.

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