Is This The End Of The Game For Tech Stocks?

• Widespread dissemination of tech sell-off
• Bears, not so fast
• Not all tech sub groups experienced Friday’s selling spree
• Commodities are down, but are they out?

Widespread dissemination of tech sell-off

In the last few days, we have seen a tremendous amount of financial media space alerting us to Friday's route in the NASDAQ, or more specifically the tech stocks. Most of the time, investors and traders make rational decisions. That means, that when such an event is so widely publicized virtually all short-term oriented market participants are aware of such a development and have usually taken action by selling. This is similar to a rational person getting off the railroad tracks in anticipation of an on-coming train. Most situations that become widely disseminated in the news media take place after a lengthy decline, where pessimism in the pits permeates beyond the usual channels. In other words, it usually takes a long time and a lot of downside price action to attract so such media attention. This time it’s different, in the sense that one afternoon’s price action has caught virtually everyone’s attention simultaneously. That could well be, because the strong 2016-17 rally has put everybody and his dog looking for the slightest vulnerability as a justification for a correction and an opportunity to jump ship.  Further near-term downside may well turn out to be the case, but  there are some technical time signs that suggests that tech stocks are unlikely to fall any further, at least in the near-term.

Bears, not so fast

Chart 1 shows the Spider Technology ETF, the XLK. It suffered that sharp decline on Friday and traded lower on Monday. By the end of the session though, it had retraced much of that new low ground, and closed near its high for the day. That price action qualified as a bullish hammer, which can be expected to support a rally or trading range over the course of the next 5-10 sessions. One encouraging fact is that Tuesday’s action tested Monday’s real body high close thereby avoiding the creation of a gap. Since gaps are usually filled, this leaves the price to work its way higher, though there are no guarantees on this one.

Chart 1

I am not saying that the XLK is going to move straight up and register new highs right away, but what the chart does suggest, is that if Friday’s high was the high, we may well get a small rally that could, in retrospect turn out to be the right shoulder of a head and shoulders top, as suggested in Chart 2.  One factor arguing in this direction is the overstretched and bearish short-term KST. However, this is pure speculation at this point and would require the price to crack below the red trendline marking the potential neckline.

Chart 2

Chart 3 supports the idea that prices will experience a bit more than a reflexive bounce. It compares the tech laden NASDAQ Composite with the NASDAQ  100 VIX ($VXN), or rather its 10-day ROC. The green horizontal line at just under 50, shows when this momentum indicator reaches an overextended (bullish ) level, The vertical lines indicate when the VIX reverses from such a level or higher. Most of the time a rally follows, as we can see from the thirteen solid green lines. The three dashed ones indicate false positives. This week has seen another reversal, which tells us the odds favor, but do not guarantee, the XLK moving higher over the near-term.

Chart 3

Finally, Chart 4 shows that the XLK itself has managed to hold above its 50-day MA, an important near-term support level. However, the RS line did rupture its 2016-17 up trendline. If this violation is quickly cleared up that will not matter. However, the sell signal for the relative KST argues for something more serious in the form of an actual reversal or forthcoming ranging action for relative performance. In other words, tech stocks may well have given up market leadership for a while. Certainly, as pointed out last week, the financials look to be in a better position to take up market leadership.

Chart 4

Not all tech sub groups experienced Friday’s selling spree

One tech group that escaped Friday’s carnage was the Dow Jones Computer Services ($DJUSDV), as feature in Chart 5. This index is still below a green bear trend line. The Relative Strength line is also stuck below a green bearish trend line. However, you can see that their KST’s are starting to turn up, compared to the XLK, where declining overbought short-term momentum is the order of the day. This group looks promising, as long as the price does not fall below its 200-day MA and red support trendline at around 140.

Chart 5

The Dow Jones Components and Electrical Equipment Index ($DJUSEC) has recently broken out on both a relative and absolute basis and neither KST has yet been affected by the recent tech decline.

Chart 6

One vulnerable area(Chart 7)  appears to be the Mobile Telecommunications group ($DJUSWC), where the RS line has started to break down and the index itself is not far above red trendline support. If tech stocks are to extend their decline over the near-term (1-3-weeks), which I do not expect, then this could be a downside leader.

Chart 7

Commodities are down, but are they out?

Commodities have been suffering in the last few weeks  and are showing no signs of an actual trend reversal. However, my two commodity Net New High indicators are offering some positive vibes. Chart 7 for instance, shows that the DB Commodity ETF, the DBC, has registered a series of successive new lows since last March. However, each time the indicator has experienced fewer commodities making 10-day new lows. The price itself is attempting to move above its breakdown trendline. If it can manage to do so that will be quite bullish.

Chart 8

The same message is coming from Chart 9, where the Bloomberg Commodity ETN, the DJP has also broken down, but doing so in the face of our 50-day new high indicator barely being below zero at this time. Right now the trend of the ETN is bearish, but a break above the red line would set the scene for a rally that would at least test the green down trendline.

Chart 9

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.