foxex: The Big Thud

Read in Browser

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, July 13, 2020

1. Profit takers sold shares as tech stocks fell hard

2. Apple shares finally considered too expensive

3. Tech stocks fall out of favor

Market Moves

The S&P 500 (SPX) fell one percent from Friday's close. That fact alone is noteworthy, but holding that information in isolation masks a more foreboding outcome. A more dramatic rendition of today's news includes the fact that the Nasdaq 100 index (NDX) fell 4.3 percent from its highest point on the day to its eventual low point near the close. That big thud we heard is tech stocks falling off their pedestal. Chart watchers have to go back to March 20th, in the depth of the pandemic panic, to find a day where that index shed more of its value within normal market hours.

The chart below compares the movement of the CBOE Volatility Index (VIX) with that of State Street's S&P 500 index ETF (SPY). The comparison in this 5-minute chart shows a dramatic divergence early in the day between the benchmark index and the VIX. The latter is primarily influenced by the pricing of options which is controlled by option sellers. Though stocks gapped up to new highs to open the day, option sellers demanded a higher risk premium and sent the VIX gapping up to start trading today as well. For two thirds of the trading session both indexes trended higher, but when the VIX began to accelerate its pace, the S&P 500 (and the Nasdaq) began to rapidly fall. That meant that any chart watchers who caught this anomaly in the intraday action were forewarned that it was time to exit some of their positions.

Apple Shares Finally Considered Too Expensive
Friday's edition of the Chart Advisor made this observation: "When markets simply keep going higher, it is useful to keep an eye on the leading sector driving indexes upward. For now, that is the technology sector. The market won't continue going higher if this sector takes a turn for the worst." That was quite timely.

Many of the technology stocks, including the three mentioned last Friday: Amazon (AMZN), Nvidia (NVDA), and Twilio (TWLO), posted notable reversals. However it was the most influential stock in the investing universe, Apple (AAPL), which gave multiple indications of a key reversal today. The chart below shows three very unusual events for AAPL and each of them occurs on a different time frame.

First, the five-minute chart on the left side of the graphic shows how the Volume Weighted Average Price (VWAP) failed to be a support for buyers right around midday. The second event can be seen in the upper right panel, where AAPL shows a $10 price range from its high to its low today. This occurs at price levels that have previously showed resistance over the past two trading sessions.

Finally, a linear-regression study stretched over the past five years can be seen in the lower right panel. AAPL shares have never been so relatively high or so far outside the region of this linear regression study. Perhaps it isn't too surprising if investors considered the stock too expensive today. Such movement won't go unnoticed. The price of AAPL is represented in every major broad market index and influences a greater number of ETFs than any other single ticker symbol.

Read more:

What to Expect in the Markets This Week

JPMorgan Chase Earnings: What to Look For

Low-Cost Airline Stocks Take Off From Support

SPONSORED BY INVESCO
The Complete Guide to ETFs
ETFs are becoming increasingly popular and soaring to new heights among investors. Invesco's insights can help you determine if these investment vehicles are right for you.

LEARN MORE >

Tech Stocks Fall Out of Favor

The Nasdaq 100 (NDX) showed two troubling signals in its price pattern today. The first, a bearish engulfing candle pattern; and the second, a number-9 day on the TD-Sequential count. This latter indicator tracks whether buyers (or sellers) appear to be exhausted in their efforts and that such exhaustion could be creating conditions where the markets may reverse. Those indications usually occur on a "9" or a "13" day. The fact that this signal showed up as a large, bearish engulfing candle only adds to the probability that this index could have trouble ahead.

The Bottom Line

Investors sold out of the tech sector and created very strong reversal signals. Option sellers seemed to know it was coming. Apple shares are telegraphing the possibility of more downward moves, and the Nasdaq 100 generated a large bearish-engulfing candle pattern today.