quod erat demonstrandum

By now, everyone knows I have been screamingly bullish on Google/GOOG for months before its IPO one year ago. Although I remain as bullish as ever, despite the higher price and valuation, I turned short term cautious during June (as most of you will recall). Now is a good time to show you why that was, and what I expect going forward...

[click to enlarge]

Area 1 (in the chart above) is a top. Not just any top, however, but a rising top. Note points a, b, and c. These are reversal days from new all time highs. If you look closely at this or any chart, you will discern many such reversal days, but not all reversal days are similar. Point b created for me a more cautious, less bullish (short term) environment. Point c reified that concern. I believe it axiomatic that valid price support is prevalent only in bull markets, and valid price resistance is found only in bear markets. Bull markets repeatedly exceed resistance just as bear markets repeatedly exceed support. The typical decline following such a top, however, tends to be shallow in price.

Yes, I know everyone is now advising you to sell (and even short) Google/GOOG, but not all broken trend lines result in a pattern of lower highs and lower lows. Some instead are prefatory to a fresh intermediate term base within the continuing long term uptrend. Thus are most investors fooled; by the inability to have spatial awareness, to place a price and value within any meaningful context. In fact, note Point A, which is the first bullish reversal.

And this is precisely what Google/GOOG has every appearance of now building -- a new intermediate term base. This base does not preclude the possibility of lower lows; in fact, the decline could reach down to ~$250 +/- 5%. (Recall the rising top included successfully higher highs.) Note too the dessication of volume the past month. It is only one month into a pattern that typically requires either three or six months to complete before stretching to new highs. If I had my druthers, this base would continue for the full six months; after all, the larger the base, the larger the ultimate move. QED.