Bearish Divergence

The market had a very negative reaction to Google's earnings report. After the strong sell-off following the recent earnings release, I think it is safe to say that GOOG's bearish divergence has received confirmation.

What is bearish divergence? Bearish divergence occurs when the price action of a stock is making higher highs, while the indicators are making lower highs. Bearish divergence can indicate that the current uptrend is possibly losing some of its strength.

In this example, I used MACD. But, several other oscillating indicators follow the same principal. Like KDJ, RSI, OBV, etc. The faster the oscillator, then the more corrections that will be indicated..

After a bearish divergence receives confirmation, then you could expect at least a small correction.

In this case, GOOG has already experienced a big correction. Is there more room for downside after this already substantial correction? Or should we expect a rebound very soon? Let's take a look at the technicals to get a good idea of a price point where we might see a possible rebound.

The long-term and the medium term picture still look technically bullish. You can see in the first chart directly below that. The strong selling ended at a major support level. In the second chart, you can see that the selling stopped at a previous support level derived from previous highs in price printed several months ago.

Also, take note that the selling ended near the lower support level of the price channel in the chart directly below. I have highlighted this price channel with blue trend lines.

Often, you will see price action rebound off of support levels within price channels. You can see how this trend line acted as support in the past. This adds to the validity of this imaginary trend line.

I have also pointed out the major suppor/resistance levels that I will be watching for a dip buy opportunity with this great company.

These gaps in price that you can see below have me a bit worried. Sometimes, the market will fill the gap to take all of the unfilled orders before picking a direction. You can treat unfilled gaps as areas of support and resistance also.

Personally, I didn't think that the earnings release was all that disappointing. Maybe I am missing something. Perhaps the market priced in too much value before the earnings release. Unless we finally see that recession that everybody is talking about, then I think there will easily be a lot more upside in this company's share price.

Having said this, I will be anxiously waiting for a rebound in price because I think GOOG is one of the best investments in the stock market. They have a ton of cash, and they just keep making more.

Technically speaking, GOOG is already in a good area for a rebound if, and only if, this correction is just a short-term correction. But after such a negative reaction, I would expect at least a little more downside or a small consolidation period before a rebound.

If you invested just before earnings, then I wouldn't worry. I think it is just a matter of time before you will profit from that investment.

One important side note that I should mention is the fact that divergence patterns are not 100% reliable all of the time. Sometimes, during a strong rally, you will see bearish divergence and a weakening trend, but no substantial downside will follow. In this case, the buyers are getting exhausted, but there are no sellers stepping in to push the price down.

You will see this often with a great stock like GOOG. I have provided a few examples of this in the chart below.

The very short-term divergence, shown with a red arrow, received confirmation and a short-term correction followed. But, highlighted by the yellow arrow, you can see the long-term bearish divergence with no substantial downside that followed. You can even see a longer-term divergence taking place, indicated by the orange arrow.

Some investors say that this occurrence is the rally or the indicators cooling off before a continuation to the upside.

This shows you that divergence is not always 100% reliable. So when you see a divergence, then don't anticipate the correction before it happens. Because it might not happen. Rather, participate in the correction when you see it taking place. And you will be ready for it since you are knowledgeable about the principles of divergence.

As always, I am not a financial professional, and this is not investment advice. Be careful and be patient. Dont anticipate the market. Rather, participate in the market. Give your investments time. Don't be greedy. Don't invest in anything you don't understand. D6h on't put all of your eggs in one basket. Don't listen to the hype. Don't fomo or panic into or out of trades. Do your own due diligence. And just follow the trends. A trend is your friend. Good luck trading.