Ascend With Google

It's no secret that Google (GOOG - commentary - Cramer's Take) turned out to be a good buy at its IPO, despite sentiment to the contrary on the Street at the time. Ever since then, many investors have found it hard to pull the trigger on such a pricey, volatile stock. This stock is definitely not for the emotional trader. It's too whipsawed, and the average investor or trader is likely to get shaken out.

When you're trying to play a stock like this, you need to find that rare occasion when the stock offers an opportunity to buy with little relative risk. I believe Google is offering just such an opportunity around current levels. I expect it to work as a near-term trade, with potential to become a longer-term position. Key to making this work is setting the stop, which I'll discuss after I lay out the potential here.

Google bottomed in August 2006 at $363 and began to form an ascending triangle. Over time, the stock has put in equal highs (at $513) to form the top line of the triangle. I've drawn in a trend line that connects the August '06 low to the lowest of the recent lows, $437, creating the bottom of the triangle. The higher lows within the pattern are the key.

Notice that from August to September 2006, each time Google came down it found support at that blue trend line I've drawn in. Each time the stock touched that line, it moved higher, at least for a bounce.

Click here for larger image.

Off the September low, Google began a strong move higher that carried it all the way up to $513 in November. Notice how on that high in November, the moving average convergence/divergence was lower than at October's high, when the stock moved just over $490. This is a classic negative divergence -- higher price, but lower MACD -- and accordingly, the stock began to fall hard, bottoming out at $452 in late December.

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At the time of publication, Steiman had no positions in any of the stocks mentioned in this column, although positions may change at any time.

Jack Steiman is president of TheInformedTrader.com, for which he also conducts live seminars, and Steiman New Research Group, LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Steiman appreciates your feedback; click here to send him an email.