On September 11 we saw a potential for Google (GOOG) to build a right shoulder in a head and shoulder pattern. We’re not exactly trading head and shoulder patterns, but there is a portion of the herd that is so it is important to know about. Our proprietary trading tool: the Decision Support Engine (DSE), which is based on Elliott Wave and Fibonacci theories has been sending us a lot of signals on Google lately.

The DSE made this potential head and shoulders forecast based on the stochastics peaking at lower highs than either the left shoulder or head.  Additionally, the upper Bollinger bands at 895 and the 5-day moving average at 888 create a strong resistance zone in the 905 +/-5 area.

RECENT PRICE ACTION

Fast forward to September 23 and the right shoulder failed to take prices to new highs, breaking the neckline of the pattern. Remember we’re not trading the head and shoulders pattern.

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By mid-week, it looked like there was enough of the herd trading the head and shoulders pattern as our DSE signaled again. This time with some actionable insights as GOOG has confirmed a five- wave decline as detailed in the chart, indicating a Fibonacci bounce toward 894 +/-3 should be next, allowing longs to exit, and shorts to enter, for the next big move toward 850, or lower.

THE TRADE

Short GOOG after the bounce to the 894 +/- 3 range, or on a break of 855, if not both. Target 795 in next three to six months. Watch the wave count and Fibonacci levels closely, if either break down you should look at exiting.