Final Flush! Part Deux
RLT Newsletter
Thursday’s gap lower was a continuation of last Friday’s gap down, and all week I’ve been on high alert for what I believe could be the final flush in this correction.
Thursday was a good start, but looking at the overall pattern, I don’t think we’re quite done yet.
Personally, I’d rather just get it over with than keep grinding sideways and lower in this choppy environment. The encouraging part is that this slow, overlapping decline still looks a lot more like a standard corrective move inside a bull run than the start of a larger bear market.
The probabilities continue to favor a classic ABC correction. If that’s right, we’re now in the final C wave of the move that began on June 5, one that has managed to frustrate bulls and bears alike for nearly two months.
QQQ Daily Chart
If SPY, QQQ, SMH, and SOXX can all make one final flush into their respective 100-day SMAs, that may be enough to reset sentiment and set up the next leg higher into the fall.
Wednesday’s earnings may have also given us an early read on the theme of this season. So far, the market seems willing to punish the companies spending enormous amounts on AI while rewarding the ones benefiting from that spending. In other words, the hardware side of the AI trade still looks like the stronger place to be. AMD, MU, TSM, AAOI, SITM, ASML, and DELL remain some of the biggest potential beneficiaries of the capex boom.
SOXX Daily Chart
GOOGL’s History Below the 200-Day SMA
After Thursday’s earnings reaction, GOOGL closed down roughly 7%, and more importantly, below its 200-day simple moving average.
Whenever a stock closes below its 200-day SMA, I pay attention. It’s one of my primary dividing lines between bullish and bearish trends.
So I went back through GOOGL’s chart all the way to its IPO to see what has historically happened after earnings gaps below the 200-day SMA. The results were surprisingly consistent.
January 2008. GOOGL gapped below the 200-day and formed a bearish candle beneath it, almost identical to Thursday’s setup. The next day it rallied back above the moving average and the prior candle, then quickly failed. Once it lost the 200-day again, it rolled into a substantial decline.
April 2011. Another gap below the 200-day, down roughly 8%, close to the current move. One more day of selling, a modest retest, then a continued slide lower.
August 2011. Just a few months later, same setup. Gap below the 200-day, rally back into it, failure at resistance, sharp selloff over the following weeks.
July 2015. This one played out differently and looks much different than todays set up. GOOGL consolidated sideways for about a week after the small gap, then reclaimed both the 100-day and 200-day with a gap and launched into a sustained uptrend.
June 2016. Gap below the 200-day, bearish candle, break lower over the next several sessions. It dropped another 8% below the moving average before finding support and starting a new advance.
October 2018. Same pattern. Bearish candle below the 200-day, failed retest from underneath, continued lower before eventually building a durable bottom.
May 2019. More of the same. Gap below the 200-day, relief rally and retest, failed the 200-day SMA once again and another meaningful leg down.
March 2020. During the COVID crash, GOOGL gapped below the 200-day, briefly retested it, then collapsed into the panic lows. Same pattern, different story.
What Does It Mean Today?
This history backs up my read on Thursday’s close. The most likely near-term outcome is a relief rally. GOOGL could reclaim the 200-day and start filling part of Thursday’s earnings gap. If it closes back above both the 200-day and Thursday’s bearish candle, I think there’s a tradable short-term swing back toward the 50% gap fill around $333.
That said, history suggests traders should remain cautious. In nearly every example above, reclaiming the 200-day SMA was eventually followed by another leg lower before GOOGL established a durable bottom. If GOOGL bounces but finds resistance at the 200-day SMA, I would expect more immediate downside.
Bottom Line
The 200-day SMA is the line in the sand. If GOOGL reclaims it, I think there’s a high probability short-term swing trade back into the earnings gap, with the 50% fill near $333 as the first logical target.
But if history repeats, that rally is more likely to be a relief bounce than the start of a new uptrend. A close back below the 200-day would significantly raise the odds of another leg lower.
If GOOGL can’t reclaim the 200-day at all, watch the open gaps around $305, $287, and $261 as downside targets. As long as it stays below the 200-day, all three remain in play.
GOOGL Daily Chart
