Choppy Summer for Tech Stocks; Watch QQQ ETF Trading
The medium-term backdrop continues to point to a choppy summer for technology. Weekly momentum indicators, which track 1-2 quarter swings, have moved from oversold levels in early 2Q to overbought levels in early Q3, and continue to show evidence of peaking. I don’t believe this signals the end of the new bull market cycle that began in March, but it does suggest a healthy pause is likely underway after the impressive 2Q rebound.
My recommendation for long-term investors is to remain patient and wait for pullbacks in the coming 1-2 months as an opportunity to accumulate quality growth and cyclical stocks at more timely technical entry points.
Diverging technical behavior among the mega-cap tech leaders suggests choppy trading ahead
In technology stock trading over the past two weeks, there were a number of technical events that suggest investors should be prepared for further choppy trading through the summer. Despite the impressive earnings growth reports delivered by the FAANG companies plus MSFT and others this week, only AAPL and FB have rallied to new highs while AMZN, NFLX, MSFT, GOOGL and TSLA remain below their July 13 highs.
GOOGL is particularly noteworthy given it is beginning to break below its rising 50-dma on rising volume and MSFT is close to challenging its 50-dma. For key trading levels for the QQQs in the coming week, look at the chart above of the shorter-term perspective of the most widely traded proxy for the Nasdaq the QQQ ETF. First, note the histogram in the top panel has fallen below its zero axis for the first time since rising above it in March. This indicates the QQQ’s uptrend is stalling.
Secondly, there are two levels that traders will likely watch in the coming weeks. The first is the July 13 reversal day highs at 269.79 that would need to be exceeded to signal a reacceleration to the upside. However, I expect that level will likely remain a tough resistance level for the QQQ to rally through in the coming weeks.
On the downside the July 24 low at 251 now serves as a level at which many traders likely have stop loss levels set, marginally above the rising 50-day moving average at 248. Should the QQQs break below 251, I would expect more traders to react to that event leading to further weakness into late summer with next support at the 38% retracement level (229).
The bottom line is that incrementally, the uptrend in technology stocks is showing evidence of fraying and pullbacks beginning to develop.
Figure: Weekly Sector Review
Source: FSInsight, FactSet
Figure: Best and worst performance sectors over past 3 months
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