Will Google Stock Continue to Drag the Market Lower?

GOOG stock
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GOOG Stock: A Bearish Trend Has Just Begun

It was in early October that my views toward the markets started to change dramatically. The reason is that the proxy that I use to gauge the health of the stock market was warning that a trend reversal was in the making. As a result, I could only question the state of the market.

Those who follow my work are already well aware that I have been using Alphabet Inc (NASDAQ:GOOG) as a proxy in order to gauge the health of the stock market. I have been using this juggernaut of a company because GOOG stock contains a most exquisite bullish trend, seen below:

Chart courtesy of StockCharts.com

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This chart illustrates that since its inception in August 2004, Alphabet stock’s price action has been characterized by a series of higher highs and higher lows. This is the quintessential characteristic that defines a bullish trend, and it creates the stair-step price action that this trend is so famous for.

When I applied one trend line to the series of higher lows within this trend, another appeared—one that not only captured the bullish trend that had been in development since August 2004, but that also pinpointed where a significant level of price support resided.

This trend line was tested many times over the years, and as the bullish trend began to age, these tests became more frequent. One thing always remained the same, though: buyers were eager to step in to support this trend line, pushing Alphabet stock higher.

GOOG stock’s inability to trade below this simple trend line was a testament to its significance, which was very difficult to refute.

This is why I began using it as a gauge for the health of the general market. I always knew that this trend line would break someday, and it would not only spell trouble for Alphabet stock, but also suggest all was not well with the general state of the stock market.

This is why when the trend line broke in October, I outlined these developments.

The broken trend line that was highlighted in that report is captured on the chart below:

Chart courtesy of StockCharts.com

This chart illustrates that on October 10, Google stock broke below the trend line that was supporting it since August 2004. This event not only suggested that Alphabet stock was prone to correct, but also served to reinforce my concerns that the markets were prone to a sell-off.

Since that date, both GOOG stock and the general state of the market have turned for the worse. The price action is suggesting that a new trend toward lower prices for Alphabet stock has just begun, which doesn’t exactly instill confidence that the market are poised to have a good start in 2019.

Not only was the uptrend line broken, but the the stock price broke below the 200-day moving average on that same day. The latter is a metric used to determine whether a stock is in a bullish state and likely to appreciate or in a bearish state, where depreciation is a greater possibility.

The break below the 200-day moving average is magnifying the implications suggested by the broken trend line. Given this information, it’s safe to assume that lower GOOG stock prices are on the horizon.

For those looking for more concrete signals, the price action that followed these breaks has been nothing short of bearish.

That’s because both the uptrend line and 200-day moving average were tested after they were broken to no avail. This test is called a backtest and serves to reaffirm that the break below these metrics was legitimate while simultaneously establishing new levels of price resistance.

In a bearish trend, the 200-day moving average is going to act like a level of resistance, just like it did on December 3. And as long as GOOG stock is primed for further losses, the market is likely to follow suit.

Analyst Take

Since breaking below significant levels of price support, Alphabet stock has been trending toward lower stock prices.

Since I place so much emphasis on GOOG stock, the bearish implications that have now gripped it are also suggesting that the stock market is primed to suffer the same fate.