NEGATIVE DIVERGENCE LEADS TO TECH SELLING -- FACEBOOK FALLS TO SIX-MONTH LOW AND LEADS INTERNET GROUP LOWER -- TECH SECTOR MAY BE VULNERABLE TO MORE PROFIT-TAKING -- DOW INDUSTRIALS AND S&P 500 ARE TESTING POTENTIAL TRENDLINE SUPPORT
OVER-EXTENDED TECHNOLOGY SPDR TURNS LOWER... Last Wednesday's message showed the technology sector looking over-extended and vulnerable to profit-taking. So this week's tech selling wasn't too much of a surprise. The daily bars in Chart 1 shows the Technology SPDR (XLK) falling yesterday in heavy trading but still trading over its 50-day moving average (blue arrow). Last week's message pointed out the "negative divergence" on its RSI line (top of chart) which fell short of its January high and failed to confirm the price move into record territory. That kind of divergence usually leads to some selling. The daily MACD lines (below chart) have also turned negative after failing to reach its January high. That's another short-term caution signal. The Technology SPDR had been the only sector ETF to reach a new record and was leading the rest of the market. That's why yesterday's technology selling spilled over to the rest of the market. The daily RSI line is now testing potential support at its midpoint line at 50.
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Chart 1
FACEBOOK LEADS INTERNET STOCKS LOWER... Chart 2 shows the Dow Jones US Internet Index falling well below its 50-day average in heavy trading. That Index met resistance at its early February high and may retest its early March low. Facebook (FB) is the main reason why. The daily bars in Chart 3 show that social media giant trading at the lowest level since last September after falling below its 200-day moving average (red circle). Facebook is being punished for allowing customer information to be used improperly. It remains to be seen if its problems spread to other social media stocks and the tech sector at large.
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Chart 2
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Chart 3
TECHNOLOGY SECTOR MAY CONTINUE TO STRUGGLE... The daily negative divergence shown in Chart 1 is only a short-term warning for the technology sector. The next chart may suggest bigger problems. Chart 4 overlays a 14-week RSI (blue) line over weekly bars for the Technology Sector (XLK). While the XLK hit a new high earlier this month, its 14-week RSI line failed to regain its upper line at 70 (blue arrow). That created a more serious negative divergence between the RSI line and the price bars. Negative divergences on weekly charts are more serious than on dailies. At the very least, Chart 4 may be suggesting that an over-extended tech sector may need more time to restore its upside momentum. It may also suggest a bigger retracement of its February/ March gains. Any additional tech weakness could weigh on the rest of the market.
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Chart 4
DOW AND S&P 500 TEST TRENDLINE SUPPORT ... Stocks indexes appear to be on the defensive this week. Chart 5 shows the S&P 500 Index trading back below its 50-day average after failing to clear its late February high on a closing basis. The SPX is now testing a rising trendline drawn under its February/March lows. The rising trendline starts at the February 8 low and excludes part of the following day's early selling. That makes for a flatter and more realistic trendline. Any serious drop below that potential support line would be a negative sign. My message from last Thursday showed a potential triangle forming in the Dow Industrials. A triangle is formed by two converging trendlines as shown in Chart 6. There again, I've redrawn the lower trendline to a flatter slope. And it's now being tested. I suggested last week that technical odds favored an upside breakout. For that to remain a possibility, however, the lower support line has to hold first (see black arrows).
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Chart 5
