While waiting for the trading halt on GOOG to be lifted, I decided to
study the weekly chart a bit more and here’s what stood out to me:
Just as it did leading up to the previous top in 2007, GOOG has
recently set up in a text-book rising wedge pattern, complete with very
solid negative divergences in place on the oscillators below. From my
experience, these patterns, when confirmed by unmistakable divergences
in place, have a very high probability of playing out. However, there
are times, typically during periods of extreme bullish sentiment, where
prices actually break to the upside of the pattern about exactly when
they have reached the typical breakdown point (roughly ~70% to apex).
Why that happens, I’m not exactly sure but my guess is that a lot of
it has to do with a large number of traders shorting the stock early on
anticipation of what looks like a high-probability breakdown of the
pattern. However, due to the extreme bullishness and strong upside
momentum in the markets at this point (usually just before a top on the
stock or the broad market), the stock is hit with a buying climax,
which is not uncommon at market tops. The buying climax overwhelms the
shorts, thereby triggering a short-squeeze causing prices to rise even
more sharply, a domino effect if you will.
Whether or not my theory holds water can be debated but I can say that shorting wedge overthrows have been some of my most lucrative and
high probability trades over the years. As highlighted in this chart,
that is certainly what happened with GOOG leading up to it’s 2007 peak,
just before that nearly 70% plunge in the stock. Only time will tell
whether or not we are in the early stages of a similar pattern but so
far, it sure appears that way.
The first step will be to see GOOG make a
solid weekly close back within this rising wedge pattern. Keep in mind
that this would also confirm a very powerful bull trap as it would mean
that GOOG has closed back below the recent breakout to new all-time
highs. The next, and final, confirmed sell signal would come on a
downside break below the current rising wedge pattern, the bottom of
which, is also the primary uptrend line from the GOOG’s IPO date back in
august 2004, another very bearish level if broken.