For today’s trade of the day, we will be looking at a Moving Average Convergence/ Divergence (MACD) chart for Alphabet Inc. (GOOG), states Chuck Hughes of Hughes Optioneering.
Before breaking down GOOG’s MACD chart let’s first review what products and services the company offers.
Alphabet Inc. offers various products and platforms in the United States, Europe, the Middle East, Africa, the Asia-Pacific, Canada, and Latin America. It operates through Google Services, Google Cloud, and Other Bets segments. The Google Services segment provides products and services, including ads, Android, Chrome, hardware, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube. It is also involved in the sale of apps and in-app purchases and digital content in the Google Play store; Fitbit wearable devices, Google Nest home products, Pixel phones, and other devices, as well as in the provision of YouTube non-advertising services. The Google Cloud segment offers infrastructure, cybersecurity, data, analytics, AI, machine learning, and other services; Google Workspace that include cloud-based collaboration tools for enterprises, such as Gmail, Docs, Drive, Calendar, and Meet; and other services for enterprise customers.
MACD Indicator Confirms Price Momentum
The GOOG daily price chart below shows that GOOG is in a price uptrend as the 24/52 day MACD line (black line) is above the 18-Day EMA (purple line). The Moving Average Convergence/ Divergence chart is shown below the daily price chart. MACD uses moving averages to create a momentum indicator by subtracting the longer-term moving average from the shorter-term moving average. The MACD is calculated by subtracting a stock’s longer-term 52-Day Exponential Moving Average (EMA) from its shorter-term 24-Day EMA. This creates the MACD line.
MACD ‘Buy’ Signal
The 18-Day EMA line functions as a buy/sell ‘trigger’. When the 24/52 Day MACD line crosses above the 18-Day EMA line it indicates positive momentum and higher prices for the stock. When the 24/52 Day MACD lines cross below the 18-Day EMA it indicates negative momentum and lower prices for the stock. MACD is more of a leading indicator than a moving average cross which tends to lag price movement.
MACD Histogram Shows Acceleration of Momentum
Also included in a MACD chart is the histogram bar graph. This portion of the chart helps to illustrate the distance between the 24/52-Day MACD and the 18-Day EMA. When a crossover initially occurs, the histogram’s bar will be near flat as the two indicator lines have converged. As the lines begin to separate, the bars grow in height, indicating a widening gap and acceleration for the stock’s momentum. When the histogram’s bars begin to shrink this indicates a narrowing of the gap between the 24/52 Day MACD and the 18-Day EMA and a slowing of the stock’s momentum. When the gap between the two indicators begins to narrow, this typically indicates a crossover of the indicator lines could happen soon.
Buy GOOG Stock
As long as the 24/52 Day MACD line remains above the 18-Day EMA, the stock is more likely to keep trading at new highs in the coming days and weeks. Since GOOG’s bullish run is likely to continue, the stock should be purchased. Our initial price target for GOOG stock is 130.00 per share. 91.3% Profit Potential for GOOG Option. Now, since GOOG’s 24/52 Day MACD is trading above the 18-Day EMA this means the stock’s bullish rally will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for a GOOG call option purchase.
The Call Option Calculator will calculate the profit/loss potential for a call option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat GOOG price to a 12.5% increase. The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following GOOG option example, we used the 1% Rule to select the GOOG option strike price but out of fairness to our paid option service subscribers we don’t list the strike price used in the profit/loss calculation.
Trade with Higher Accuracy
When you use the 1% Rule to select a GOOG in-the-money option strike price, GOOG stock only has to increase by 1% for the option to break even and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call option and the underlying stock closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if GOOG stock is flat at 123.52 at option expiration, it will only result in a 3.7% loss for the GOOG option compared to a 100% loss for an at-the-money or out-of-the-money call option.
Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money call options. This higher accuracy can give you the discipline needed to become a successful options trader and can help avoid 100% losses when trading options.
The goal of this example is to demonstrate the powerful profit potential available from trading options compared to stocks. The prices and returns represented below were calculated based on the current stock and option pricing for GOOG on 6/8/2023 before commissions. When you purchase a call option, there is no limit on the profit potential of the call if the underlying stock continues to move up in price.
For this specific call option, the calculator analysis below reveals if GOOG stock increases 5.0% at option expiration to 129.70 (circled), the call option would make 43.8% before the commission. If GOOG stock increases 10.0% at option expiration to 135.87 (circled), the call option would make 91.3% before the commission and outperform the stock return by more than nine to one. The leverage provided by call options allows you to maximize potential returns on bullish stocks.
