Market weakness could spread into big tech stocks in coming weeks, with the most widely held issues heading to much lower ground. The downturn would serve two purposes. First, shake out excessive complacency following strong post-election rallies that have reached bull market and all-time highs. Second, test 2016 and 2017 breakout levels while encouraging sidelined capital to buy the dip.
Many sector funds hit 2017 highs on March 1, in reaction to President Trump’s Congressional address. It’s been all downhill since that time, with bank, biotech, transportation, steel, and infrastructure stocks breaking 50-day EMA support. Big tech and the Nasdaq-100 have held resilient through the pullback, but that’s likely to change because corrections eventually spread into core leadership because the where the last batch of bullish fervor is hiding out.
First quarter earnings could trigger this slide so observant market players will be watching key reports from Apple, Inc. (AAPL), Facebook, Inc.(FB) and Netflix, Inc. (NFLX), three of this year’s biggest winners. All are still trading close to rally highs despite weakness in broad benchmarks, raising odds for sell-the-news reactions that allow bears to take control for the first time in 2017.
Apple topped out just above $130 in the first quarter of 2015 and entered an intermediate correction that found support in the low-90s in August. It turned higher after testing that level in January and May 2016, reaching resistance in February 2017. The stock then broke out and added about 15-points into the April 5 all-time high at $145.46. It turned lower last week and closed under the 20-day SMA for the first time since December 6.
Weekly Stochastics crossed into a sell cycle in March, predicting at least six to twelve weeks of sideways action or lower prices. Meanwhile, On Balance Volume (OBV) failed to break out with price, slumping below the early 2015 peak in a bearish divergence that signals weak institutional sponsorship. The unfilled February 1 gap between $121 and $127 (red circle) may act as a magnetic target in this setup, with a decline into that level offering a buying opportunity.
Facebook eased into a rising channel in 2014, with those boundaries still in play more than three years later. Three 2015 tests at channel support got bought, yielding a series of new 2016 highs, ahead of a late-year downturn that threatened to break support near $115. Buyers returned when the calendar flipped to January 2017, lifting the stock above the October peak at $133.50 into April’s all-time high at $143.44.
Stochastics entered a weekly sell cycle at the same time as AAPL and has drifted below the 20-day SMA for the first time since Jan. 3. OBV is also flashing a bearish divergence, stuck below the October 2015 peak. More importantly, the rally has reached the rising highs trendline that marks long-term channel resistance, adding to technical headwinds that are likely to trigger a deep slide.
Netflix broke out above the 2011 high at $43.54 in 2013 and entered a stairstep rally that topped out near $130 in the second half of 2015. A decline into 2016 found support in the mid-80s, ahead of a fourth quarter rally that yielded a January 2017 breakout. The stock has struggled since that time, adding just 6-points into the March 30 all-time high. A 2-week downturn has now dropped price into the second test at the 50-day EMA in the past month.
The stock has also carved an OBV deficit while weekly Stochastics supports the upside with a buy cycle. Even so, a decline through $141 will break moving average support and complete a reversal that could trigger a decline into the October and January gaps. That breakdown will take just a small push from the current level because sideways action since January has built a large supply of anxious shareholders still waiting to get paid.
The Bottom Line
Nasdaq-100 and big tech stocks have held near rally highs since many sectors topped out on March 1. It’s likely that aggressive sellers will soon turn their attention to these resilient issues, dumping them to lower ground while sending the broader market into a steep mid-year correction or downtrend.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>