A Big Triangle For A Big Stock

10/03/06 11:53:57 AM

by Arthur Hill

After a big advance in 2005, Google consolidated in 2006 with a big triangle, and the subsequent break will decide this bellwether's fate.

Security: GOOG
Position: Hold

Google ran from below 200 to above 400 in 2005. After exceeding 400 in January 2006 and rising over 100%, the stock embarked on a consolidation process that has lasted nine months so far. A big advance deserves a big consolidation, and that is exactly what is happening. The stock became overbought in January 2006 and needed to work off this condition. See Figure 1.

FIGURE 1: GOOGLE. GOOG leaped from below to above 400 in 2005, then embarked on a consolidation process in 2006.

Graphic provided by: TC2000.com.

Graphic provided by: Telenet 2007.

The triangle is a neutral pattern with lower highs and higher lows. Buying pressure is not strong enough to forge higher highs, but selling pressure is not strong enough to push the stock below its prior low. Hence, the consolidation tightens like a coil. A break above triangle resistance or below triangle support is required for a new directional bias. A move above resistance would signal a continuation higher and open the door to new highs, while a move below support would be bearish and project weakness to the first quarter consolidation (gray oval).

FIGURE 2: GOOGLE. In recent months, GOOG gapped higher and broke above the August high in mid-September (white oval).

Graphic provided by: TC2000.com.

Graphic provided by: Telenet 2007.

The stock recently surged to triangle resistance and is on the verge of a breakout. GOOG gapped higher and broke above the August high in mid-September (Figure 2, white oval). The advance ran into resistance from the upper triangle trendline and pulled back the last few weeks. This pullback reinforces resistance. I would look for a break above 420 to turn long-term bullish again. Failure to break 420 and a move below the resistance break at 390 would give the bears the edge.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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