While news of a potential break-up has investors reasonably cautious on Alphabet Inc. (GOOGL) , this week’s pullback could be setting up one of the more bullish patterns in the technical analysis toolkit. Let’s dig into what this pattern represents, and what key price level investors should be watching for in the days to come. The inverted-head-and-shoulders bottom is formed when you have a major low surrounded by two higher lows. In the case of GOOGL, that means we’re focusing on the September low around $148, as well as the higher swing low in early August around $155. This week’s sell-off could result in the formation of the right shoulder, completing the set-up of this bullish price pattern. An ideal inverted-head-and-shoulders pattern features a fairly symmetrical pattern where the left and right sides are comparable in time and price range. So a right shoulder in the $155-$160 range would line up well with the price action over the last quarter. The good news is GOOGL is testing its 200-day moving average this week, currently sitting around $159.50. Further price support could emerge at the 61.8% retracement level using the March to September rally as a framework for the analysis. So Alphabet is definitely in the price range where meaningful support could be expected. The most important level for this price pattern is the “neckline” formed by the swing highs between the head and the two shoulders. In this case, that would mean the price highs in mid-August and earlier this month. Note how this neckline lines up almost perfectly with the 38.2% Fibonacci retracement level using the framework described above. I tend to relate a chart like this to using an “if-then” statement in Excel or your favorite computer language. If GOOGL is able to break above the neckline at $168, then we would most likely see a retest of the July peak around $191. Other Magnificent 7 stocks Interestingly enough, Alphabet is not the only Magnificent 7 name testing its 200-day moving average this week. Fellow mega cap growth stocks Amazon.com, Inc. (AMZN) and Microsoft Corp. (MSFT) are also testing this long-term trend barometer on the daily charts. If charts like AMZN, MSFT, and GOOGL are able to hold their 200-day moving average, then October could turn out to be just a brief interruption of a larger bullish phase. But if leading names like these are unable to hold key moving average support, that would likely have a dramatically bearish impact on the major equity averages. -David Keller, CMT marketmisbehavior.com DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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