Hi everyone,

For this weeks Chart of the Week I thought I’d take a look at one of the world’s best known companies, the company whose search engine most of use at least once a day, Google. Since its beginning as a Stanford research project by Larry Page and Sergey Brin in 1996 Google has gone on to concur the world of online search and advertising. 13 years on Google has a market cap of over $180 billion, annual revenues of over $20 billion, profits of over $8 billion and has almost 20,000 full time employees (1,500 of which are based in Dublin). Not bad going. In todays post I am going to look at some of the new areas Google is expanding into as it tries to maintain its amazing growth rate and I will also cover off some possible trading techniques for what is arguably one of the hardest stocks out there to trade successfully.

Microsoft targets Google - The Challenge of Bing

Launched earlier this summer, Bing is Microsoft’s latest attempt to move in on Google’s patch and try get it’s paws on some of the lucrative online search advertising revenue. To put it in context as to how important online advertising is to Google, over 95% of it’s revenues currently come from it’s search engine and Adsense program which places Google ads on millions of websites worldwide. Described by Microsoft as a “Decision Engine”, Bing aims to categorise search results and help users get to useful information and features quickly. In an effort to generate loyalty Bing also offers a Cashback scheme which gives people cash back for products bought through the Bing search engine. In a further effort to get Bing out there Microsoft signed a 10 year deal with Yahoo! at the end of July which would see Bing become the exclusive search engine for all Yahoo! sites in exchange for a complex revenue sharing agreement put in place.

So how is Bing doing so far? Well not too bad, after less than 6 months on the go Bing has gained 9.5% of the US online search market. It’s still a long way behind Google’s 65% share and even further behind the 81% of the global search market that Google has managed to build up over the years. To-date it looks like Bing’s success in gaining market share has largely come at the expense of Yahoo! rather than Microsoft’s primary target. As for how good the search engine itself is, well I haven’t really tried it out much so can’t say, I guess I’m a Google man at heart and while it continues to do the job for me I don’t see any reason to change. If any of you out there have become Bing fans then I’d be interested to hear why you think it works better than Google, use the comments box at the end of the post to share your thoughts.

Google targets Microsoft - The Chrome and Android Operating Systems

But far from being a one way war with Microsoft trying to take down Google, this one has a lot more spice to it, as Google is just as eager to take down Microsoft in any way it can. While getting under Bill Gates’ skill is a bonus for the Google team in truth it is not their primary motive. In fact what they are searching for is new revenue generating opportunities which will allow it to maintain it’s phenomenal growth rate and help justify the massive PE (currently 37) the stock is currently trading at. Google started it’s move into the online applications space a few years back, lead by the launch of Gmail and soon followed up with Google Calendar and Google Docs. Last year Google attempted to reduce Microsoft’s dominance of the browser market with the launch of Chrome. A year on Chrome is now the world’s 4th most popular web browser after IE, Firefox and Safari with 3.6% of the market. It has a long way to go to make a significant indent on IE’s 65% share but it’s off to a decent start. I just checked the starts for SpreadTrader.ie there now using Google analytics and Chrome actually accounts for 6% of all traffic.

And the logical extension for Google after the launch of Chrome was to develop it’s own operating system to directly go after Microsoft’s bread and butter, Windows. As it turns out Google has decided to develop not one, but two Operating Systems, and now we have the Chrome OS and the Android OS. While Google freely admits there will be some overlap between the two in short they see Chrome powering netbooks and desktops while Android will focus on the smartphone market. And the hype surrounding the recent launch of the Motorola Droid phone indicates that the Google’s Android OS could be a real alternative to Apple’s iPhone. Google expect that there will be least 18 different phone models worldwide using the Android OS by the end of 2009, not a bad start. The Chrome OS on the other hand appears to have a tougher challenge facing it as it goes head to head with Microsoft’s Windows 7. By all accounts Windows 7 appears to be a massive improvement on Vista and looks likely to go a long way to saving Microsoft’s market share. It will be interesting to see how the Chrome OS develops over the coming years and if it does become a real alternative to Windows. The fact that both Android and Chrome are open source does mean that it’s not just the Google engineers that Microsoft needs to worry about, but a whole new breed of developers out there, most of whom are bigger fans of Google than Microsoft.

A Look at the Technicals – Ways to Trade Google

Right so enough of the chat about the Google / Microsoft battle for supremacy and onto the stuff we are really interested in, trading Google. First up, Google is not one for the faint hearted and certainly not one for novice traders. The Google share prices moves up and down faster than the energizer bunny on steroids! It often moves 500 points or more in as little as 10 or 15 minutes. Also given the very high share price means it requires a pretty large balance in your spread trading account in order to open a trade in the first place. Most of the spread trading companies require you to have a 15% margin on account in order to open a trade, so while that’s not too much of an issue if you are trading Microsoft for example, where you’d only need €450 in your account to open a €1 a tick trade, it’s a different story when it comes to going long or short on Google, where you’ll need to stump up close to €9000 to open the trade at Google’s current share price of close to $600 a share. So I fully understand that many traders out there may not have the margin to trade Google or even if they do, just don’t want to take on such a volatile trade. For those who have built up larger trading accounts there are some benefits to trading a stock like Google, firstly the potential upside is significant, for example anyone who went long Google at the start of July with a €1 a tick trade and applied a loose stop would now be up over €18K in less than 5 months. Secondly the volatility in the stock gives day-traders and momentum traders some excellent opportunities for short term trades.

So to some of the approaches to trading Google. From experience the one approach that really does not work is applying your normal stoploss, lets say if Google is at $575 (57500) and you decide you want to go long and risk €500, so you put a stop 500 points below at 570000. I’ve tried this approach in the past and almost every time I was stopped out within a day or two, and sometimes within a few hours and left cursing a loss of a few hundred euro as Google reversed back in the direction of my original trade which was just stopped out. That’s just the nature of Google. If you take a look at the daily chart below you will see that Google has clearly being in an uptrend for the last 6 months as it climbed from $290 to over $580 today, effectively doubling in value. However during that 6 month rise there were many pullbacks along the way. I’ve highlighted just 5 of these in the chart below using the blue brackets to show the gap between the high point and the low point before the rise resumed. On the six month chart none of these look very significant pullbacks but when you analyse them they range in size from a pullback of $23 to a pullback of $33 with the other three coming in somewhere in between. From a points (ticks) perspective that’s five pullbacks ranging form 2300 points to 3300 points, scary stuff if you are going long and trying to figure out where to set your stop loss!

Google 1 Year Daily Chart (Click to Enlarge)

So if you really do want to trade Google for the longer term and trade the trend so to speak then you need to use a very wide stop unless you want to be continuously stopped out only to see Google rebound a few days later and carry on to new highs. When I have being trading Google over the last few months I have looked to go long on the pullbacks (e.g. when it hit $530 at the start of the month) and put quite a wide stop in place, usually a few hundred points below the 50 day moving average. This approach has served me well over the last few months but it does require nerve and a lot of patience. The other important point is that when Google does start to move up above your entry point you really need to resist the urge to close out your position too quickly and take your profit. This is an area I personally need to work on a bit more, too often in recent months I’ve panicked and rushed to close out positions, which while profitable, really should have being much more so had I just shown more discipline and patience with the trades in question.

The second approach is really one for the day traders out there. It’s not an approach I have used too often but I do know a few full time traders who use it regularly and very successfully. Because of its volatility, Google can be a great momentum trade. There are often days when the market either rallies strongly or falls back sharply (e.g. days when the DOW rises or falls 100+ points in a day) and it is these days that Google more often than not tends to trend in the direction of the overall market. This can see it gradually rise or fall 500 to 1000 points in the space of a few hrs. The 2 minute chart below is from Monday and serves as a good example of this. Monday was a strong up day for the market as a whole and Google followed the trend right from the off. Momentum traders would use a 1 or 2 minute chart to identify and follow these trends. The example highlighted in the chart below shows how a trader could have gone long Google 10 minutes after the market opened (giving it some time to find a clear direction) at around 57800 (see green arrow). They could have kept the trade open until such time as they saw the upward trend starting to fade and drop back, deciding to close once the 20 day moving average was crossed, at a price of 58500 (see blue arrow). Such a trade would see them close out with a €700 profit for a trade that lasted a little over 1 hour. This type of trading strategy requires you to be in a position to keep a close eye on your trade and being ready to act quickly to close out and lock in your profits. You also need to be ready to use a very tight stop (maybe 200 pts below) with this approach and be willing to take your loss if the trade does not work out as planned early on. Another tip for this type of short term trade on a volatile “Google” type stock is to always close out your position before the market closes, regardless of whether you are up or down at the time. These are not the types of trade you want to be holding over night because you have no way of knowing where the stock will open up the next morning. It can often gap up or down, leaving the short-term trader nursing much larger loses than originally planned for when they opened the trade the day before.

Google 2 Minute Chart From last Monday (Click to Enlarge)

So there are two approaches to trading Google which hopefully will help those brave enough to take this bad boy on. Longer term I’m definitely bullish on the stock, regular readers may remember that a couple of months ago as part of my Apple Chart of the Week post I said I thought Apple was going to $200 and Google was going to $500 before the year was out. Apple eventually got to it’s target and is holding on there just above the $200 mark. Google on the otherhand smashed through $500 within a few weeks of that post and I see it breaking $600 again before long. Only last week UBS upgraded it’s price target for Google to $700, so while there will be plenty of bumps along the way, the upside potential to this stock is huge!

Until next time,
Happy Trading!
SpreadTrader.ie :- )

P.S. Apologies for the lenght of this post, I wrote it over a few days this week and as a result it ended up a bit longer than planned…