This Is Why Google Stock Is a Proxy for the Stock Market

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iStock.com/volkan.basar

GOOGL Stock: A Bullish Trend in Development

The NASDAQ composite index has just completely erased all the losses that were administered when the markets began their swoon in late January. In a real sign of strength, this index is standing tall, flexing its muscles as new highs are being forged. This is a very impressive feat considering the magnitude of the sell-off that just preceded it.

I, of course, am not the least bit surprised, because, since early February, I outlined the indications that I believed were suggesting that a bottom was at hand and that higher index values were likely to prevail. You do not have to take my word for it; my report can be found by clicking here.

That report outlined a number of indications, including the volatility index and the S&P 500 index, but my favorite indicator to gauge the health of the markets continues to be Alphabet Inc (NASDAQ:GOOGL) stock.

The reason why I continue to use GOOGL stock as a proxy for the markets is actually quite simple, and the following Alphabet stock chart illustrates why:

Chart courtesy of StockCharts.com

This Alphabet stock chart illustrates that I use GOOGL stock as a proxy for the health of the markets based on the price action that has occurred since inception.

The price action on the Google stock chart is a perfect display of a bullish trend in action. It contains the quintessential characteristic that defines all bullish trends, which is a sequence containing a series of higher highs and higher lows.

Connecting this sequence of higher lows was responsible for creating the uptrend line, which is highlighted in blue on the Alphabet stock chart. This uptrend line serves to not only define the bullish trend, but also outline where price support can be found.

This uptrend line has been in development for over 13 years, and over this time frame, this uptrend line has been tested a number of times. And each and every time, the stock price has found its footing right on it and higher prices have prevailed.

Using this trend line as a tool is just as easy as it was to create, and as long as Alphabet stock is trading above it, I can only assume that a bull market is still in development—and higher Google stock prices will therefore prevail over time.

If, on the other hand, GOOGL stock ever lost its footing and started trading below this uptrend line, I would have to assume that the bull market in the stock has finally met its demise, with lower prices likely to follow.

This uptrend line is also my gauge for the general health of the stock market, because Google stock has never been below it. If it would ever trade below it, I would have to assume the worst: that a bear market has begun.

That is why, when this uptrend line was tested in February along with the other metrics I mentioned, I had the inclination to believe that the market had found a bottom and that higher prices were likely to prevail.

Higher prices have prevailed, and the following stock chart takes a closer look at the correction and the price action that followed:

Chart courtesy of StockCharts.com

This Google stock chart illustrates that along with testing the uptrend line, Alphabet stock also tested a very influential metric in the 200-day moving average. This average is much like the uptrend line, in that it acts like a diving line that separates bullish investments from bearish ones. Trading above it is bullish, while trading below it is bearish. This metric acted like a level of price support, and once it was tested, higher GOOGL stock prices prevailed.

When the sell-off began in February, Google stock gapped lower. The recent rally has come back to fill this gap, which means that selling pressure can intensify in the coming days, because anyone who was caught as the GOOGL stock price gapped lower can now exit their respective positions.

Analyst Take

I continue to carry a bullish view on Alphabet stock because it continues to trade above an uptrend line that has been in development since Google stock first began trading. This is a very influential uptrend line, and as long as GOOGL stock is above it, I will believe that it and the stock market are in a bull market.