Archive of Trading Education Articles

Google’s Split Personality: Impersonating Jekyll and Hyde
By Anthony Trongone, Ph.D., CFP, CTA*
Posted: Mar 31, 2006

So, you know Google; it certainly has been an outstanding breadwinner. But, after gaining $266 in its 403 trading days, can you answer these two simple questions?

• How much of Google’s $266 increase came from trading during the regular trading session: From the opening (9:30 a.m. ET) bell to the closing (4:00 p.m. ET) bell? 
• Despite Google’s success, it has come down hard from its highest price of $475.11 on January 11, 2006 to $331.55. What eSignal indicators were capable of predicting its $36 headline reaction to the upside on March 23, 2006?

When trading in the regular trading session, this high-flying darling was capable of producing a 14.66 percentage increase, but, since its inception, it’s actually down $50. Therefore, the profit from trading in the overnight session was $316 (316 – 50 = $266).

The line chart shown subsequently depicts the running summary of percentage change during the 403 regular trading sessions. It has fallen sharply below its regression line. Unfortunately, for those with a long position during its 40-day correction of $143.56, much of your suffering came from losing $114.35 in the regular trading session (RTS), thereby absorbing 80 percent of this 40-day pullback.

Before concentrating on the overnight trading session, let’s turn our attention to Google’s steady rise (the brown line in the chart shown subsequently) after experiencing a $42 after-hours breakaway on October 20, 2005. The advance, however, did not win over many technicians because the rally’s trading volume wasn’t impressive.

Although we can attribute the $36 after-hours recovery to the headline news, there were also technical factors at work, thereby making it a more attractive buy. For instance, after its $42 October upside gap, it rallied to its highest price -- with average volume (the brown line in the subsequent chart). Thereafter, it took 96 days (the yellow line in the chart shown subsequently) to return to its breakaway price of $331. Although there was a brief recovery -- with lower volume (the orange line in the chart shown subsequently), it quickly fell to form a triple bottom, which became an eye-catching play for many perceptive technicians.

Leonardo Fibonacci to the Rescue

So, what indicators are helpful in predicting a lightening-fast, after-hour recovery from a $143 pullback in 50 trading days? By looking at the daily bar chart, you can see how the FIB RET indicator was correct in forecasting the long-bar increase on March 23, 2004.

The primary ratios of 38% and 62% describe a common proportion found throughout nature and made most famous by a 12th century mathematician, Leonardo Fibonacci. In the bar chart shown subsequently, we examine a countertrend by using the FIB RET indicator.

Although, by themselves, Fibs are reliable at spotting reversals, they become even more dependable when they supplement other technical indicators. In the chart shown subsequently, we can see how the 38% retracement comes precisely at the beginning of the breakaway upside gap.

Fortunately, eSignal gives us four Fibonacci mathematical indicators to measure the sequence of any price correction. In a monthly chart of goog’s performance, by clicking on the FIB RET, we can easily construct a sequence of percentage scores. How we arrive at the calculations that show a 38% percentage retracement of Google is seen in the following table:

In looking at a monthly bar chart, we get another picture of a correction at the 38% barrier. In the eight losing months (red), you can see how the closing price generally recovers by returning to the opening monthly price.

Dr. Jekyll: The Overnight Trading Session

This line chart is a remarkable display of Google’s success in the overnight trading session. Currently, it is running below the regression line. It has, however, a history of staying fairly close to its red line and eventually returning to its upward position.

Past performance is often a good indicator of future results, but don’t trade blindly. By charting the running performance of the overnight session, you can apply technical analysis to formulate your trading decisions. On this basis, by monitoring the overnight session’s running performance, you’ll find that it’s best to trade with the upward trend line. But, if it begins pointing downward (regressing toward the mean), you can stay on the sidelines or take a short position.

*Reprinted (and modified) with permission from Anthony Trongone, Ph.D., CFP, CTA, Director of Executive MBA Programs in China at Centenary College in Hackettstown, New Jersey

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