Warning: This Stock Has Further to Fall

Large-cap technology stocks notably underperformed the broader U.S. stock market in June.

As a result, shares of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), which I particularly stayed away from in April and May due to their severe overbought nature, finally began to mean revert lower.

While the move off the highs thus far has been a good start, I do see some more downside ahead for GOOGL stock in the near to possibly intermediate term.

Over my thus far nearly 20-year career as a trader, market strategist and portfolio manager I have learned to adhere to several key rules.

One such rule is to never ever chase higher vertical charts that blow out of their longer-term up-trending ranges to the upside.

I repeat this rule on a daily basis to my clubhouse members, direct clients and mentoring students because it is that important.

Case in point, GOOGL stock in the second half of April, following its latest quarterly earnings report, began to shoot out of its up-trending channel and thus in my eye became extremely overbought in the intermediate term.

To be clear, just because something becomes intermediate term overbought does not make it a short, but the reward-to-risk on the upside becomes decisively less attractive.

GOOGL Stock Charts

On the first chart, we see that although GOOGL stock in June did begin to mean-revert lower, thus far it has merely pulled back to the upper end of the multiyear up-trend.

Through a long enough time frame, ultimately the stock will likely mean-revert all the back down to the lower end of this channel, but that is not my call right here right now.

To be clear, the longer-term bullish picture for the stock remains well intact.

On the next chart (still weekly bars) we also see that over the past few weeks GOOGL stock has seen a couple of clear weekly bearish reversals as represented by the long red bars. While the bears are already getting loud on the back of these weekly bars, for me, more is needed to call off the intermediate-term bull trend in the stock and for now I am merely calling for a mean-reversion move lower and not an outright intermediate term short in the stock.

On the daily chart, the bears look to have decisively more strength for now, and even though GOOGL stock may be immediate-term oversold, active investors do have a well-defined next downside target.

A simple but effective way to measure either upside or downside price points is to target unfilled gaps. In the case of Alphabet stock, its upgap following the late-April earnings report remains unfilled and would fill close to the $890 mark.

Thus, active investors and traders could consider playing GOOGL stock to the short side in small size (or using cheap put option spreads), using the $890 as a well-defined price target and respecting any strong bullish reversal as a stop loss signal.

— Serge Berger

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Source: Investor Place