GOOG could be setting up for a major move

Google (GOOG | Quote | Chart | News | PowerRating) has had a rough week by its standards. After starting things with a bang on Monday morning, the stock has put together three days in a row where the highs of the day were seen by 11:00 AM. In fact, the sessions on Monday and Wednesday each had the elements of key reversal days--with GOOG experiencing some fairly heavy a selloffs from solidly positive to solidly negative territory.

Also note that eBay (EBAY | Quote | Chart | News | PowerRating) and Yahoo! (YHOO | Quote | Chart | News | PowerRating) have shown bearish tendencies this week and will likely follow GOOG fairly closely on Thursday and Friday.

Let's take a look at the 5-day chart of GOOG to get a better feel for how things may progress the rest of this week:

Notice how since Monday around noon, GOOG has had several periods of high-volume selloffs along with a series of lower highs. On the positive side, GOOG has recovered nicely from the extremely sharp selloffs, each time bouncing and settling above 424.00, which looks like an extremely important support level for GOOG in the short term.

This type of descending triangle formation is not an indicator of future movement in one direction or the other like a head and shoulders reversal pattern or a pennant formation might be. Instead, traders should use this formation as a warning flag that something bad might happen with the stock and prepare to take advantage of it if it does.

The key to day trading Google on Thursday and Friday is going to be found in the responsiveness that GOOG has to the 424.00 support level and the downward sloping line connecting its lower highs. If GOOG breaks 424 support and stays under that level for more than 30 minutes, you've got a potential breakdown in the making and a great opportunity for short selling profits. In the DaytradeTeam Live Trading Room, we will also be watching for opportunities to sell short as GOOG approaches the top line of the triangle, with a tight, angled stop loss that gets us out of the position in the event that GOOG puts in a new higher high and breaks the formation.

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Andy Swan

Andy Swan created and co-founded DaytradeTeam five years ago on a principle of empowering individual stock and options traders with the techniques and analysis methods typically reserved for elite professionals. His expertise in technical analysis and commitment to educating members earned DaytradeTeam a top-ranking among advisory services for several years.