Google ripe for a fall

http://www.marketwatch.com/news/yhoo/story.asp?source=blq/yhoo&siteid=yhoo&dist=yhoo&guid=%7BD62F9BF0%2DD012%2D4E7A%2D8E12%2DDA25FA07B282%7D


NEW YORK (CBS.MW) -- Once buying stops working, selling usually starts.

It's been less than four months, and the initial public offering of Web search engine Google has recaptured the imagination of those who have been searching for the lost Internet boom.

The $200-plus price targets some analysts have slapped on the stock has reminded many of the $400 price target Merrill Lynch had put on Amazon.com and the $1,000 target the former PaineWebber placed on Qualcomm back in the good ol' days. See Upgrades/Downgrades.

Google shares (GOOG: news, chart, profile) actually made it above $200 in intraday trading (Nov. 3 high of $201.60), but could never actually close above that mark (the high close was $196.03 on Nov. 1). While the stock has pulled back since and still trades above most analysts' price targets, there are some technical indicators that suggest investors are using the dip as an opportunity to buy the stock.

However, there are even more signs that suggest that the buying won't work in the near-term, and that an ever deeper pullback is imminent.

Google's technical storm

Google's stochastics indicator -- a two-line "mathematical" technical indicator that compares the stock's closes relative to its intraday highs and lows -- has been putting in a pattern of higher highs and lows since the stock first pulled back from the $200 level. Read more about mathematical indicators.

After bottoming out at just above 7 on Nov. 8, the slow stochastics ran up to 80 on Nov. 15, fell back to just above 14 on Nov. 22 before climbing to a high of nearly 94 on Nov. 30. See interactive java chart and change a lower indicator to "slow stochastics."

By itself, it might appear bullish since it indicates the stock has been consistently able to close near its intraday highs on up days, a behavior which usually suggests underlying strength by the bulls.

But you also have to see what the stock has actually been doing over the same time period to put the indicator's moves in perspective.

And over the same time, the stock has established a pattern of lower highs and lower lows, which together are necessary and sufficient components of a downtrend.

The stock had bottomed at $165.27 on Nov. 9 before rallying to a high of $189.80 on Nov. 12 (the stochastics reached a high of 80 a day after). It then fell back to a low of $161.31 on Nov. 21 before reaching a high of $183 on Nov. 30 (the stochastics reached 94).

The divergence between the stochastics and the actual stock price is considered bearish, because it suggests the stock is becoming "overbought" and progressively lower levels.

Buyers keep buying, but the stock isn't going up.

There is another technical indicator that is also pointing to weakness.

The relative strength index (RSI), an oscillating indicator that compares up days and down days over a specified time period, has been declining along with the stock price. It reached just over 62 on Nov. 15, but couldn't quite make it to 60 when it topped out on Nov. 30.

Also, the inability of the RSI to get above 60 is also bearish (the RSI isn't considered overbought until it rises to the 75 to 80 level). Prior to Google reaching its high, 60 had been support for the RSI while it made several probes above the 80 level.

This suggests that it has been taking a lot more energy to move to the stock higher than it has to move it lower.

On Friday, the stock closed up $1 at $180.40, but had been down as much as $1.80 at a low of $177.60 in intraday trading. While the bounce might suggest strength, the intraday slide, coupled with weak technical readings, suggests the stock has become vulnerable to a quick strike by the bears.

Finally, Friday's intraday high of $181.06 was below Thursday's high of $181.51. How much longer will bulls be willing to fight without getting anything to show for it?

'Gaps' should cushion any slide

If the stock were to begin to slide, there should be decent support at the opening in the chart between the Nov. 24 low ($172.51) and the Nov. 23 high ($170.83).

These types of upside "gaps," which serve as launching points on the way up, usually provide a cushion when revisited as anyone that sold ahead of them, and were abandoned by the stock's surprise leap higher, may be tempted to cover their open positions when given the chance to escape mostly unscathed.

There should be even stronger support at the gap between the Oct. 22 low ($164.08) and the Oct. 21 high ($150.13). This was the "gap" that changed the stock from one moving steadily higher to one that charged aggressively towards the $200 mark.

Given the recent pattern of lower lows, however, the support at the latter gap is the better bet to become the target for bears.

It would take a close above $183 -- that would break the pattern of lower highs -- as well as a rise in the RSI above 60, to neutralize the short-term outlook.