How far will Google, Apple fall?

Upcoming earnings reports from Google and Apple could help the struggling shares reverse course. A look at the charts for both stocks reveals the key levels to watch.

By MoneyShow.com Apr 13, 2011 12:01PM

By Tom Aspray, MoneyShow.com

The stage was set for Tuesday’s stock market plunge by Alcoa’s (AA) earnings, which were released after the close on Monday. Even though the results were just a bit weaker than most estimates, and despite the company’s positive outlook for the year, AA was down 6.8% on Tuesday.

For the tech sector, many are waiting for earnings from Google, Inc. (GOOG), which will be released after the close on Thursday. Apple, Inc. (AAPL), another technology bellwether, will release its earnings after the close on April 20.

Last month, I analyzed the weekly charts of both stocks (see “Google, Apple: Buying Zone Ahead?”), and the daily outlook for GOOG has deteriorated further in the past two weeks. The earnings for both companies could be the catalysts for identifying short-term turning points.

Click for full-size image

Google Chart Analysis: Google, Inc. (GOOG) made marginal new highs on January 19 at $642.96 but closed Tuesday at $570.61 and is down just over 11% from the highs. GOOG has continued to be weaker than the S&P 500, and worse-than-expected earnings could be the event that pushes the stock below key support.

The daily chart shows a potential head-and-shoulders (H&S) top formation with key support at the neckline (line a) currently at $551. There is additional support and the weekly uptrend now in the $518 area

More important chart support is in the $500-$508 area and a break of the neckline would project a drop to the $460 area

The relative performance, or RS analysis, peaked in October 2010 and formed much lower highs in early 2011. More importantly, the RS broke below support on February 22 (line b) when GOOG closed at $610.21

This established a pattern of lower highs and lower lows in the RS, line c. This increases the probability that GOOG will also break key support

The volume pattern does support the H&S top formation analysis, as volume was highest in October and has declined since. The daily on-balance volume (OBV) has broken below support (line d) going back to late November and also shows lower highs and lower lows

As noted previously, the weekly OBV (not shown) did not make new highs early this year and the negative divergence has weakened the intermediate-term outlook

There is initial resistance for GOOG at $585 and a close above $598 would clearly improve the technical outlook. More important resistance now stands at $610-$620

Click for full-size image

Apple Chart Analysis: Apple Inc. (AAPL) has been in a steady decline for the past two weeks, and with Tuesday’s close at $332.40, the stock is now 8.9% below the February 16 high of $364.90.

AAPL is now reaching next chart support (line a) in the $326 area. If this level is broken, the 38.2% retracement support, as calculated from the August 2010 lows, is at $315.80

The rising 200-day moving average (MA) is at $306 with the more important 50% support at $300. The weekly uptrend (not shown) is at $293

The daily OBV has turned up from support at line b and needs to move back above its weighted moving average (WMA) to turn positive. The weekly OBV (not shown) did confirm the recent highs

Very short-term resistance is at $341.10 and the 20-day exponential moving average (EMA), and a close above this level would be a short-term positive

There is further resistance at $351.60 and then at $354.50. If these levels are overcome on a closing basis, it should signal that the correction is over

If this year’s trading range is resolved to the upside, the first projection targets are in the $377 area

What It Means: As we enter earnings season, it is generally impossible to gauge the market’s reaction to earnings data. Sometimes worse-than-expected numbers are met with buying, while just slightly weaker numbers are met with heavy selling.

Regardless, it is important to examine the technical outlook for a stock or sector before pivotal earnings are released. This will allow you to be better prepared during earnings season.

Though the chart for GOOG looks weak and does suggest further selling, if the stock could close strong on lackluster earnings, it would start to change both the sentiment and technical picture.

How to Profit: The RS analysis for GOOG should have alerted investors to the deteriorating technical outlook in February, so they could have hedged long positions or used tighter stops.

On a daily close below the neckline, the risk on long positions in GOOG would be much higher.

The longer-term technical picture for AAPL is much better, and the stock is already approaching first good support. A strong close in AAPL on volume of over 18 million shares could signal a short-term low.

In terms of risk, until the daily momentum turns positive, I would only look to buy AAPL at $303-$306.90 with a stop at $294.70 (risk of approx. 4%).

DATA PROVIDERS

Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.

Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Financial Information.

Japanese stock price data provided by Nomura Research Institute Ltd.; quotes delayed 20 minutes. Canadian fund data provided by CANNEX Financial Exchanges Ltd.

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