Google looks for an upward surge before earnings results

We would like to exploit a new opportunity among the tech sector stocks going into the performance results for Q3 of 2024. We talk about a less-known interesting equity (stocks) and options strategy in this brief.

Date: Sep 23, 2024

Market Focus: Equities & Options

Time Horizon: 14-day swing

Distribution Time: Post-Market

Market Overview

• Global Sentiment: After the recent Fed rate cut last week, which was more or less priced in by the stock markets in the US, now the sentiment shifted more to a cautionary approach having the market stagnant throughout the day. VIX remained stable and the market looks for further cues on upcoming rate cuts. Fed officials have indicated for more room for larger rate cuts signaling a frenzy of among rates traders. IMF has warned of economic collapse in 2025 and a potential hard landing for the US if they don't start to cut faster to achieve their targets by EoY. Fed dot plot already gave us where we might be for the upcoming quarters, and investors are cheering the soft landing situation. Fed's Goolsbee from Chicago expresses more cuts for 2025. This leaves a void for the magnitude of the cut we may see before Christmas ending Q4 2024. We also are closely monitoring the middle east tensions where Israel just wiped out 500 Hezbollah militants in Lebanon. Unless, there's a major escalation, which we don't see happening in the near term from other countries joining the war, we don't see an effect from oil either as OPEC is heavily trying to put the price under control after increasing their stockpiles with increased production.

• Key Economic Data: Nothing major other than consumer spending data after the market opens, which signals the strength of the economy in the US.

• Current Market Condition: The market is currently stagnant and neutral. We see this as indecision and are potentially waiting for major developments in the next few days. Although the good news from FOMC is priced in, there's still more to come going into the November elections. So, before such a large move, we anticipate some sideways action for the next few days. There are some major stocks in the tech sector that are ready to surge higher, such as Tesla, Google, etc. Nvidia may have cooled off and is also spending time traversing through consolidation and accumulation zones on lower time frames. With this, let us now look at the stock of Google and why it is in the right position for a big move upwards.

Technical Analysis

• Major Support/Resistance Levels for Stock GOOGLE:

  • Support: 151, 148, 142.50

  • Resistance: 176, 183, 192

• Indicators:

  • Moving averages (e.g., 50-day, 200-day)

  • MACD (Moving Average Convergence Divergence) signals buy

  • Bullish divergence on both daily and weekly charts between the price and MACD already manifested a few days ago and will continue forward into the upcoming earnings unless a conflict occurs later

  • Fibonacci extension levels are drawn to point out key levels for exit

  • Volume Profile - naturally good for such a large-cap stock - gains momentum

  • True range is a bit tight meaning to spend some time accumulating before a surge upwards

  • Has strong support on weekly time frame with long-standing previous resistance now acting as a support where the stock has bounced upon

  • No other conflicts on lower and higher time frames.

Chart

Trade Rationale

Choose either equities or derivatives, not both, for which the risk will increase acting against our intentions

Equities

• Asset/Instrument: GOOGLE [Stock]

• Ticker: GOOGL

• Trade Type: Long

• Entry Point: 162

• Exit Target: 182

• Stop-Loss: 143

• Position Sizing: 5% of the portfolio (don't risk more)

Derivatives

Asset class: Options

Trade Type: Bull Put Spread

Sell GOOGL Dec20 180 Put for a credit Buy GOOGL Dec20 175 Put for a debit

Net credit received $375/ contract

Probability 30%

Return/Risk 2.55

Margin/max loss $107

Time left 88 days

The behavior of selling the above deep in-the-money spread is similar to buying a bull call spread - both have similar payoff profiles, although theta isn't affected here as our main focus is on the direction. The goal of entering this deep ITM spread position is to enter already a losing position and turn into profits as our prediction on direction becomes right as the time approaches the expiry in December. There is a minor risk of assignment inherent in selling deep-in-the-money options if the buyer exercises them as these are American options.

The upcoming earnings release of Alphabet Inc. will be of great interest to investors. The company's upcoming EPS is projected at $1.83, signifying an 18.06% increase compared to the same quarter of the previous year. Meanwhile, our latest consensus estimate is calling for revenue of $72.78 billion, up 13.62% from the prior-year quarter.

There are also a bunch of analyst rating changes that reflect the changing dynamics of the sector and business environment - only relevant for investors and not for the traders looking to capitalize on this upward move. Technically speaking, there's major support on both the daily and weekly charts if you see where the price has started moving up. Another major factor for the surge upwards is the bullish divergence between the price and MACD indicators both daily and weekly; although there's a slight conflict on 4H in the near term, the stock may fall a bit and spend time in consolidation to accumulation zones, as we mentioned earlier. This shouldn't be a problem as there are upcoming earnings on October 22nd.

Check the levels written above for boundary points where the stock may react.

Strategy

• Catalysts: Earnings on October 22nd, 2024 for Q3 performance.

• Risk Factors: Nothing major. Minor risk of assignment if sold a bull put option spread

• Correlation: Not applicable.

• Portfolio Exposure: This trade adds a positive exposure to the tech sector weightage and is a net bullish position for the overall portfolio exposure at the time of writing this brief.

• Maximum Risk: 1-5% of the total portfolio capital. No deviation!

• Hedging Strategy (if applicable): NA.

  
  

Economic Events

10:00 AM EST: Consumer Spending.

• Impact: This may cause slight volatility in US equities ahead, but nothing major to worry about.

Summary

We intend to give it ample time and exit before the earnings results. If you are comfortable, you may try waiting further into the expiry or November. If profit appears, we may exit on demand as usual, at which point in time, you will receive an email alert for the trade closed or adjusted.

Closing Notes

This trade is valid only as long as the price doesn't move 3% - typically for a day or two. Don't consider the trade if the stock has moved beyond 170 or don't accept less than $200 for the option spread position.