Market tops are often achieved in volatile fashion, unlike the bottoming process which tends to be rounded and smooth. The Nasdaq displayed that type of action this week, especially in the latter half as Thursday-Friday period lost nearly 3%, in hefty volume. To add to the bearish narrative, everyday this week CLOSED in the lower half of the daily range, and the 3.1% weekly slump was the largest since the 6.5% cratering the week ending 3/23. The only other larger weekly loss of 2018, besides this week, was the week ending 2/9 which slipped 5.1%, and both of the aforementioned weeks were quickly comforted bit its rising 200 day SMA. The good news the index is about 3% away from that secular line now, but the more times it is touched the more fragile the support becomes. The question arises will this turn out to be another very abrupt V shaped pullback we have become accustomed to, or is it the start of something more sinister? Of course no one knows for sure, but the technical damage is becoming unnerving. The week ending 9/21 recorded a doji candle, which tends to indicate exhaustion in the prevailing trend, and the engulfing candle at all time highs this week in bulging trade should give bulls pause. The behavior of leading stocks was yet another warning. With the abundance of unfavorable circumstances currently, the quote “if it is obvious, its obviously wrong” is something the bulls can hang there hat on, perhaps the only thing besides seasonality. And from a contrarian perspective, with an overwhelming negative sentiment here, maybe a bottom will be put in place next week. However, before acting on it makes sure PRICE confirms that a tradable low is in place, by the way of a bullish candlestick pattern.
Arguably two of the most influential subgroups within technology are the software and semiconductor names. We know chips are in nearly everything we purchase and the cloud, supposedly is ready to take over the world. I will let others determine that, I just focus simply of the PRICE action of the charts. Below we witness the contrast between the sectors and the Nasdaq itself. Notice how from late last December-March they are traded nearly in tandem, until software began to act anything but soft. One of the things I most take away from this is just how well overall the Nasdaq has acted, even with little contribution from the semis. The SMH registered a break below a long WEEKLY symmetrical triangle this week, so I still have to be convinced technically that the group should be released from the penalty box. Adding to tech worries is the heaviness felt within software recently, and that combination has many comfortable raising cash, until strength reemerges.
One of the big benefits of technical analysis is knowing when you are wrong. Adhering to tight stops helps in keeping losses to a minimum, even if it happens to be a former best of breed play. In my humble opinion the chart will speak to you well before the fundamentals, as to when a bearish, or bullish trend change is taking place. Below is an example and the chart of VSH, an electrical components play, and exactly how it was presented in our Technology Game Plan from 9/28. The stock is on a current 5 week losing streak down by a combined 22%, and lower 8 of the last 10. Looking back this name was a leader rising 63 of 96 the weeks ending between 1/22/16-11/24/17 that began at the very round 10 number. The round number theory also came into play recently, with the 20 figure being a neckline in a bearish head and shoulders formation, and the stock now sits 28% from most recent 52 week highs.