Alphabet (GOOGL) - Get Report is scheduled to report earnings after the closing bell on Thursday. The company formerly known as Google is positioned well above a "golden cross" on its daily chart, but has the challenge of a price gap to the low of $771.55 set on April 21. This gap was caused by a negative reaction to earnings three months ago.
Technical analysis theories suggest that price gaps are almost always filled. The positive weekly chart shows the stock is positioned to fill this gap if there is a positive reaction to earnings.
TheStreet's Jim Cramer holds Alphabet in his Action Alerts PLUS portfolio. He and co-manager Jack Mohr are "confident" in the company despite some apprehension going into earnings.
"We believe expectations heading into the quarter could still be somewhat mixed given the difficult comps and evolving competitive landscape that has spooked some investors," they wrote in a recent note. "The rally over the last couple of weeks, however, is a testament to the company's quality management and long-term growth story in that investors clearly took advantage of the selloff to add to their positions or to initiate new positions."
Both the daily and weekly charts for this momentum stock thus favor a positive reaction to earnings. Analysts expect Alphabet to earn $6.47 a share. Investors will be focusing on the growth of revenue from Google search engine growth, particularly from mobile applications.
Here's the daily chart.
Courtesy of MetaStock Xenith
Alphabet trades around $760, down about 2.5% year to date and about 6% below its all-time intraday high of $810.35 set on Feb. 2. The stock had a negative reaction to the June 23 vote by the United Kingdom to exit the European Union. The stock traded to its 2016 low of $672.66 on June 27 and is now 13% above this low. The stock closed at $761.97 per share on Wednesday.
The stock had been above a "golden cross" since June 26, 2015, when the closed at $553.06. A "golden cross" is confirmed when the 50-day simple moving average rises above its 200-day simple moving, which is a signal that higher prices lie ahead.
This "golden cross" was still in play when the stock traded to its all-time high of $810.35 on Feb. 2, but the signal ended on June 24 when the close was $685.20. This puts the focus on the 200-day and 50-day simple moving averages of $738.92 and $727.28, respectively, as the share-price zone that needs to hold following a negative reaction to earnings.
To the upside the focus is on the April 21 low of $771.55. Investors reacted negatively to earnings reported after the close that day creating a price gap down to the April 22 open of $743.91.
Look at the price action going back one year. There was a huge price gap higher from the close of $601.78 on July 16, 2015 to the open of $680.00 on July 17. Then from the close of $681.14 on Oct. 22 there was a price gap to the open of $750.06 on Oct. 23. These price gaps show how volatile this stock can be following positive reactions to earnings, hence the focus on the April 21 low of $771.55.
Note that the even these huge price gaps of July 17, 2015, and Oct. 23 were later filled.
Here's the weekly chart.
Courtesy of MetaStock Xenith
The weekly chart shows a red line through the price bars, which is the key weekly moving average (a 5-week modified moving average). The green line is the 200-week simple moving average considered the "reversion to the mean." The study in red along the bottom of the chart is weekly momentum (a 12x3x3 weekly slow stochastic), which scales between 00.00 and 100.00, where readings above 80.00 indicates overbought and readings below 20.00 indicates oversold. A negative weekly chart shows the stock below its key weekly moving average with weekly momentum declining below 80.00 in a trend towards 20.00.
The weekly chart for Alphabet is positive with the stock above its key weekly moving average of $734.96 and well above the 200-week simple moving average of $560.01. Note how the stock has been above its 200-week since the week of Oct. 7, 2011 when the average was $249.87. The weekly momentum reading is projected to rise to 60.05 this week up from 44.57 on July 22.
Investors looking to buy Alphabet should consider doing so on weakness to $704.25, which is a key level on technical charts until the end of September.
Investors looking to reduce holdings should consider selling strength to $864.35, which is a key level on technical charts until the end of 2016.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.