When shares of Google (NASDAQ: GOOG) fell for three days in a row after rallying to new, all-time highs in early January, was your first thought: “Time to buy!”? Or was it “Time to sell!”?
And having bought or sold or done neither in early January, what did you make of Google’s second pullback that same month? When the stock gapped down by more than 7% on the open, and then proceeded to sell off for five days in a row, were you thinking: “Not going to miss the rally this time”? Or were you thinking” “Bet it won’t happen again”?
For short-term traders who base their investment approach around buying short-term weakness and selling short-term strength, Google’s responses to short-term pullbacks in bull market territory were impressive, but not astounding.
Each of the previous two pullbacks in Google: the short,sharp, three-day, profit-taking, sell-off shortly after the beginning of the new year, and the more severe, gap-down and five-day pullback that took the stock lower in the second half of January, was met by strong buying in the short-term. In early January, shares of GOOG finished higher for six out of seven trading days after the correction, gaining well over 2%. And after gapping down and selling off for five consecutive sessions, Google gained ground for eight out of the next ten trading days, adding more than 7%.
This, it should be said, is how markets really work – at least in the short-term – with markets trading from oversold to overbought as buyers move in to take advantage of “merchandise” that had become too inexpensive to resist. And as prices rise to accommodate dwindling inventory, the sellers retreat, regather, regroup.
And eventually, as markets again become short-term overbought, the sellers return.
At this point it is likely that these sellers more represent additional profit-takers from Google’s recent rally rather than traders aggressively looking for lower prices. Down just shy of 1% on Friday, GOOG has a positive edge of half a percent – an edge that is subject to growing if the current pullback in Google even remotely resembles either of the stock’s previous corrections in January.
If Google does continue to retreat and perhaps even become oversold above the 200-day moving average once again, then what might be a potential catalyst for renewed buying and higher prices? One bet is a new, Google home entertainment system. As reported by The Wall Street Journal, the new Google entertainment system would facilitate streaming music wirelessly through the home using Google Music. The user would control the entertainment system, believed to be based on Android, from a smartphone or tablet.
While this home entertainment system is not slated to be released until later in 2012, the fact that news of the system is “out there” means there may be more than a few investors looking to buy Google ahead of any major product unveiling down the line. And if shares of Google should continue to trade lower over the next few days or even weeks, there may be a significant number of high probability, short-term traders joining them.
Want more stocks? Read our latest from 7 Stocks You Need to Know: “The Intel Pullback as Pitstop: Three Down, Six Up”.
David Penn is Editor in Chief of TradingMarkets.com