Bounce doesn’t change Equity Trend to Positive just yet, but constructive to see Tech strength

Key Takeaways

  • ”Turnaround Tuesday” has brought US Equities up to near yesterday’s highs in QQQ, SPY,DIA, yet doesn’t change trend to bullish just yet
  • Four SPX GICS Level 1 groups up more than 1% helping breadth show a 2/1 positive reading; Tech outperforming despite an uptick in rates
  • Small-caps have taken the lead in turning higher vs Large, owing largely to Large-cap weakness
  • “FAANG” names now getting closer to important trendline support and thought this group should be something to buy dips in once confirmation of a low is at hand

SPX rally back to just above Monday’s highs is a minor positive in helping momentum stabilize in the short run. However, more will be needed to change trends back to bullish. As discussed in recent days, broader momentum gauges and breadth are still negatively sloped, and premature to buy dips for trading purposes given structural concerns. Risk-reward certainly improving for dip buyers, but technically the key area of support remains 4216-4244, which aligns with key Fibonacci projections and lies near July 2021 lows.

Bounce doesn’t change Equity Trend to Positive just yet, but constructive to see Tech strength
Source: Trading View

New Technical Developments

  • Small Caps have begun to show more relative strength to Large in the last couple weeks. This has more to do with large-cap weakness than Small cap strength, as Invesco’s S&P Small-cap 600 Equal-weight ETF, and Russell 2000 have been largely range-bound for months
  • Sharp Snapback for Technology is helpful after a relatively weak showing in recent weeks since early September. While “FAANG” has relatively underperformed to broader Tech since early September, it’s been largely neutral since last Fall
  • Stocks like AAPL, MSFT, FB, AMZN, GOOGL have all pulled back to recent lows, while NFLX remains a relative outperformer of late. It’s thought that AAPL in particular along with FB have limited downside here for the month of October and appear like attractive risk/rewards to buy dips, regardless if the stocks have made their official bottom for October

As seen below, Ratio of the IWM to SPY is one way to view strength in Small-caps and this has been strengthening in recent weeks. However, much of this has more to do with Large-Cap Tech weakening than actual Small-cap strength. Importantly, the downtrend for IWM to SPY has broken downtrends from March highs indicating a good possibility that Small-caps will hold up relatively better in the near-term.

Bounce doesn’t change Equity Trend to Positive just yet, but constructive to see Tech strength
Source: Optuma

Apple (AAPL) looks much more attractive to buy here for a trade than a month ago

AAPL has neared the lows of its one-year trend channel following a 9% decline in the last few weeks. Key support lies at 133-135, but risk/reward has improved substantially, and this looks unlikely to break Spring 2021 lows right away.

Momentum indicators like RSI have arrived at official oversold levels with RSI now down at 30, not dissimilar from what happened in May and February. While oversold reasons alone aren’t a compelling reason to buy, when this coincides with meaningful trendline support it raises the odds of an attractive buying opportunity.

DeMark indicators like TD Sequential and TD Combo were prominent in signaling exhaustion for AAPL in early September right near the highs. These look to be potentially 3-5 trading days away now on daily charts, and any further weakness into mid-October could allow these to line up in an even better risk/reward situation.

Bounce doesn’t change Equity Trend to Positive just yet, but constructive to see Tech strength
Source: Optuma

DeMark indicators that were instrumental in flagging former highs and lows are close to lining up again- Charts by Symbolik show a different way of looking at AAPL, as the daily price action is shown along with DeMark indicators of TD Sequential and TD Combo. Note, these were present at last September and this past February’s peaks and also near this past September 2021 high to indicate the possibility of trend change (which worked quite well) Now prices have not yet triggered this same exhaustion; Yet prices are right near the bottom of this channel, shown below with an uptrend line connecting several different lows since last year. Since its incredibly difficult to pick the exact lows, it’s better to just consider using a 9-10% decline to buy dips in AAPL given that this area represents attractive near-term support in the mid- $130’s. Risk-reward looks appealing and technically I feel it’s worth giving AAPL consideration with Monday 10/4 close of $139.14 bringing this to within 5% of material support.

Apple Daily chart (AAPL)

Bounce doesn’t change Equity Trend to Positive just yet, but constructive to see Tech strength
Source: Symbolik

Finally, charts of my “FAANG” composite, containing FB, AAPL, GOOGL, MSFT, TWTR, BIDU, AMZN, NFLX, BABA, NVDA, and TSLA have indeed fallen in recent weeks as technology has shown its first material weakness since February. Yet, this decline should present a chance to buy technically given the recent pullback which has not broken down under Spring lows, particularly while many stocks like AAPL, GOOGL, FB are very near to meaningful trendline support. While indices require a bit more proof of having bottomed, the “FAANG” group doesn’t look to be breaking down materially on weekly charts and likely should bottom out in the next 1-2 weeks. Relative charts of “FAANG” vs the Equal-weighted Technology does show a rather lackluster trend in the last year, neither outperforming, nor underperforming materially as many names have drifted sideways. Until there is some meaningful weakness to pay attention to on a weekly basis, not just daily, dips should be used to buy.

Bounce doesn’t change Equity Trend to Positive just yet, but constructive to see Tech strength
Source: Optuma

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