Did A 300 Year Old Discovery Torpedo Google?

On November 8th Google (symbol goog) had it sharpest one day point move for the year, as it dropped over 37 dollars for a stunning 5% loss for the day. Many Google traders were shocked at the severity of the down move. The move which was like a tidal wave of selling pressure triggered two key technical indicators to turn negative for the first time since August 23rd. This ended what had been an amazing bull run for Google and the two other titans of tech, Apple (aapl) and Research in Motion (symbol rimm). It also proved that gravity, discovered 3 centuries ago by a mathematician and physicist Sir Isaac Newton was alive and well.

Many traders were simply stunned by Google's market action as it led the tech sector meltdown. Here was one of its shining stars caught in a downdraft that seriously damaged it's stock price and the psyche of many traders.

Chart Courtesy of MarketClub.com

The first chink in Google's invincibility was now in place a the stock plunged over 14% in just three days!! How could this happen? Wasn't this Google, the darling of the tech world, the one stock that always goes up? It was never supposed to go down, was it?

Now for the good news. Could the precipitous drop in Google's stock have been predicted? The answer to that question, is yes and no.

Technical analysis is enormously important when measuring market sentiment and judging on how hot a market is running. Google's move below its Parabolic Support line on 11/08 was the first indication since August 23rd when this indicator turn positive that Google was in trouble. A day later on November 9th, Google crashed below its Moving Average Convergence Divergence line (MACD) this also added to Google's downward spiral. These two indicators that are widely available in most commercial charting package and well as our own MarketClub.com confirmed that the down move in Google was for real.

While Google appears to have put in a top at $747.24 on the November 7th it remains to be seen if this is major top. Our gut feel, is that this is an important top but we have no confirmation that this is a major top for this stock. We expect that Google will have to do a great deal more backing and filling south of the $700 level and enter into more of a two way market in the short term.

As for me, I will be watching both the Parabolic and the MACD indicators to see where this market bottoms out.

Adam Hewison