Alphabet (GOOGL) posted really solid earnings. Here’s your trade for tomorrow. (April 23, 2018)
GOOGL QQQ
I want to look at Google or Alphabet ( NASDAQ: GOOGL ), here’s why: The company just reported earnings and they beat expectations on earnings and revenue and the stock is up, right? Well, let’s look at the 5-minute chart and you can see. A big jump, right on the numbers, that is probably the algorithms; if we look at the 1-minute chart you can what has really happened here.
So how are we going to trade this tomorrow? A couple things: First of all, if you look at the pivot points here, these are based on today’s prices. The pivot point here for R2, it’s 1104.00 so we will just say it is 1100.00. This is the second resistance level; these pivot points are three levels of support. First of all the pivot line is here, that’s kind of the midpoint of trading and then based on the last bar here, the daily chart, the last bar’s open-high-low-close, you’ve got a level of support.
The first level, the second level, and the third level of support. And then the first level, the second level, and the third level of resistance. The idea is it used to give floor traders, there are about four of them left, floor traders ideas of where the right levels are. For example, if a stock jumps up above our one, jumps up to our one that is the first level of resistance and so you would expect that that is where the stock would sell-off.
If it doesn’t sell-off that indicates to traders that the stock is really strong, they go long and now they start looking at the next level or resistance, and then if that breaks through the third level of resistance. So it gives traders a way to have a relative sense of high and low. And then similarly here on this support level, this first level of support right here, this is where you would expect a stock to hold on a pullback. If it doesn’t traders will go short or at least will liquidate their longs and then look for the next level of support, etcetera, etcetera.
When we combine these R levels here, this R1 with the implied move in the options contract (I am just using the April 27th contract, the one that expires this Friday), that implied move is just $53.00. So that implied move would take us clear up to 1125.00. Now, this implied move is not a target. It is literally the extreme level at which the option market prices and the maximum that the stock could go. It is like 50 points to the upside, 50 points to the downside, wherever that tends to be, 1025.00. That is what the option market would look to see as far as the extreme levels. So what you wind up doing is selling out of the money calls, 1125.00, or selling out of the money puts at 1025.00 and then you make money on the contraction. In other words, the idea that your implied volatility shrinks after earnings, in this case shrinkage is good, it shrinks after earnings and then you make money having sold before earnings because the stock is going to stay in the middle.
Now, I look at that and I see the way the option market had priced the move and this has come nowhere near it. In fact, getting back to the R levels, at one point Google ( NASDAQ: GOOGL ) was above even R2 and into R3 in this after hours trading and now it is right back to where it started from. So if you just take away this big outsized move Google ( NASDAQ: GOOGL ) is just absolutely flat.
So what does this mean? Here is what it means to me: I am not going to touch Google ( NASDAQ: GOOGL ) tomorrow; I think it is actually a negative for the market. It wouldn’t surprise me if the stock opens up lower this morning. You get that big enthusiastic high because they have beat numbers and then when details come out the stock starts to tank. I would not be buying calls on this tomorrow. I definitely would not be buying puts.
What I would wind up doing if Google ( NASDAQ: GOOGL ) starts trading down below 1070.00 I will start selling calls against this, maybe the 1100.00s, 1110.00s. And will look to make some money first thing in the morning on, hopefully, a little bit of applied volatility crush. But also just a directional move to the downside because you can see the way the Nasdaq ( NASDAQ: QQQ ) is trading and Alphabet or Google ( NASDAQ: GOOGL ) makes a big part of that. You can see that there is some weakness here and so we want to take advantage of that in two ways. First of all, don’t be taking stocks that are going down. Second of all, make a trade, a short trade on stocks that you think are going to continue to go down.
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