The technology sector has been one of the darlings of Wall Street over the past several years. Extremely strong uptrends combined with predicable price action near major levels of support have consistently provided traders with profitable opportunities. As you’ll see in the charts below, recent closes below long-term trendlines have put the validity of the uptrend into question, and many traders are now expecting prices to head lower into 2019.
Technology Select Sector SPDR Fund (XLK)
The strength across the broad technology sector is very evident by those who look at the Technology Select Sector SPDR Fund. The persistence of the move higher and the support of the 200-day moving average on each attempted pullback have made this fund a top pick for those looking to trade the strength from across the sector. However, the recent rise in volatility and uptake in selling interest has triggered a move below the long-term support of the 200-day moving average. The breakdown, as shown by the blue circle, is a technical signal that the bears are clearly in direction of the momentum and that stop-loss orders will likely be placed above $69.68 in order to protect against a surprise move higher. The series of closes below support will be enough of a sign for many bulls to move to the sidelines, and many likely won’t choose to re-enter until key indicators turn positive again.
Althabet Inc. (GOOG)
One of the barometers of the technology sector, with a market cap of more than $700 billion, is the well-known Alphabet, parent company of Google. The extremely strong uptrend that has dominated the price action over the past several years has provided traders with lucrative buy signals, but the recent close below, marked by the blue circle near $1,127.68, is a technical sign of a reversal and could mark the early stages of a long-term downtrend. Bearish traders will likely look to protect their positions by placing stop orders above either the 50-day or 200-day moving average, depending on risk tolerance.
Amazon.com, Inc. (AMZN)
Another behemoth tech company to recently move below the support of its 200-day moving average is Amazon. Taking a look at the chart, you can see that the price hasn’t moved near the long-term support at all over the past year and a half, but with the recent close below $1,670.06, active traders have likely reversed their bets, and many will likely remain short until the major indicators suggest that prices are poised to head higher. Traders could look to the price breakdown as the beginning of a long-term downtrend.
The Bottom Line
Active traders have profited nicely from technology stocks over the past several years, but given some of the recent breaks below long-term support levels, it appears as though the good times could be over for a while. Based on the charts discussed above, many traders will likely look for major tech stocks to finish the year lower than where they are now, and bearish traders will likely look to protect against surprise moves higher by placing stop-loss orders above 200-day moving averages, which at this stage are only a couple percentage points away.
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.