Alphabet (GOOGL) - Get Report shares are testing an important level of interior pattern resistance. A breakout or a failure at this point could determine the intermediate-term direction of the stock price. A check of the weekly chart puts the current price action in perspective.
The stock broke above a long-term downtrend line in July 2015, gapping higher and then moving quickly up to the $700 area. It sent the next three months oscillating in a wide range but did make a higher low, eventually retesting and then gapping above the $700 level.
Since that time, the stock has seen additional wide gyrations in price and constructed a trading channel between $800 resistance and the $700 support level, which is also a 38% Fibonacci retracement of the 2015 low floor and this year's highs.
In April, the uptrend line drawn from the lows of late last year was broken when the stock gapped again, this time lower, and moved back down toward the channel bottom. It was able to hold above that area and begin to consolidate and recover.
The consolidation process can be seen on the daily chart as a cup and handle pattern with rim line resistance shared by the 50-day moving average and the intersection of the uptrend line and the center line of the wide channel range. It is currently testing this confluence of resistance forming a large bullish candle in Friday's session just below it. The relative strength index is tracking above its center line, and moving average convergence/divergence has made a bullish crossover. These are signs of positive short-term momentum.
The vortex indicator is designed to identify early shifts in trend by positive green crossovers and negative red crossovers. It made a positive crossover as the handle portion of the pattern was forming, which suggests the short-term trend is higher. The accumulation/distribution line is above its 21-period signal average, and the money flow index, a volume-weighted relative strength measure, is above its center line; these readings suggest improving money flow.
A break above reinforced rim line resistance should close the vacuum created by the gap, and the cup and handle pattern price projection, measured from the bottom of the cup and added to the rim line, targets another test of the upper end of the large trading channel. If it fails at this level and reverses, it is likely to pierce its 200-day moving average, which should give it enough momentum to return to the channel bottom -- but ultimately, these large channel borders will decide the longer-term direction of the stock price.
From a fundamental perspective, GOOGL is a holding in Jim Cramer's Action Alerts PLUS charitable portfolio. Cramer and Research Director Jack Mohr wrote recently that "we appreciate management's continued innovation and believe they are promoting the right projects to continue to grow their already dominant business."
This article is commentary by an independent contributor. At the time of publication, the author held ni positions in the stocks mentioned.