Buyers swooped into a dramatically oversold market on Monday, sending shares of Google (GOOG) higher by more than 4%. The stock ended the day at its highest closing level in five days.
Google was one of a number of popular stocks that was sold aggressively during the holiday-shortened trading week. Light volume allowed traders to push stocks farther than they might have fallen otherwise. That, plus the steady drumbeat of negative news and even more negative sentiment toward all things Europe, helped keep traders and investors in a “sell first, ask questions later” mood.
And while many financial pundits credited rumors of central bank intervention as the catalyst for Monday’s rally, it is also true that extreme oversold conditions and the traditional “end of month” effect have played a role in luring buyers off the sidelines and encouraging short sellers to cover their positions.
For its part, Google had closed in oversold territory for five days in a row. This created oversold conditions in the stock that rivaled even those from the August correction that sent many stocks tumbling into bear market territory. But, importantly, Google had earned “consider buying” ratings of 8 out of 10 for the last three sessions heading into trading on Monday. This meant that Google had pulled back to a level where, historically speaking, the stock had tended to attract buyers. And with GOOG up more than 4% on Monday, it looks like those high ratings and extreme oversold conditions more than did the trick.
Given the sharp rally in Google, traders and active investors should be on the alert for potential profit-taking over the next few days, as traders who were savvy enough to buy the stock as it pulled back in bull market territory exit their positions. Should that selling take the stock back to oversold levels, traders should let the ratings again be their guide as to when GOOG is again at levels where reversals and significant short term gains have been more common than not.
The stocks in today’s report were drawn from the data and research available through PowerRatings. To find out more, click here.
David Penn is Editor in Chief of TradingMarkets.com