It's all about Technology
We live in an era of advanced technology, where technology continues to play a critical and influential role in our everyday lives. Technology affects the way we communicate, learn, and think. The internet and smartphones, smartwatches, tablets, and laptops are our constant companions. They keep us connected with our families, friends, and colleagues. Digital streaming and social media apps entertain us. We purchase our products and pay our bills through electronic banking and online payment systems. It is not difficult to recognize how technology impacts our daily life.
From the stock markets perspective, the technology sector and technology-related stocks continue to play an increasing role in major market indexes. For instance, the Technology sector is now 63.47% of the overall Nasdaq NDX 100 Index (QQQ). The top 10 QQQ holdings are technology-related stocks. They collectively account for 56.47% of the overall QQQ market-cap. As of 9/15/20, the top market-cap-weighted NDX names are AAPL (13.69%), MSFT (10.66%), AMZN (10.59%), FB (4.38%), GOOGL (3.55%), GOOG (3.49%), TSLA (3.39%), NVDA (2.76%), ADBE (2.04%), and PYPL (1.92%).
The long-term technical outlook of the Technology sector and in many of the leading technology stocks remain bullish. However, the Mar to Sep 2020 rally has led to an overbought condition in this secular leadership sector. The sharp declines over the past two weeks now warn of increasing volatility over the near-term into the seasonal weakness period from September to October.
On the charts there are classic head and shoulders (H/S) tops developing in key technology markets (i.e., Nasdaq Composite Index and Nasdaq 100 Index) and many of the large technology names. H/S tops depict a bullish-to-bearish trend reversal and signals that an upward trend may be nearing its end. Historically H/S tops and bottoms are reliable reversal patterns that form after an advance or a decline. The completion of the pattern confirms a reversal of the existing trend.
As it is the case with classical chart patterns, H/S reversals can also fail. The failure to complete the neckline support breakdowns (associated with H/S tops) or neckline resistance breakouts (H/S bottoms) are equally important as this may invalidate the patterns and set into motion the continuation of the primary and prevailing trends. The failure, once confirmed, can also allow you to set new technical price targets for the newly established trend.
Typically, you would need to trade convincingly above/below the left/right shoulders. This action negates the chart pattern and confirms an H/S top/bottom failure. This then reaffirms the next move in the direction toward the head, and above this signals a new technical target that consists of adding/subtracting the height of the pattern.
So, although we remain nervous on the short-term H/S tops developing across the technology arena we are also constructive on the secular bullish trends in this sector and recommend traders monitor this technical pattern into the end of the month and possibly into October timeframe.
Enclosed below is the summary of the key technical levels associated with potential head/shoulders tops including the left/right shoulders, and neckline supports.
As mentioned above, to confirm h/s tops the neckline support levels must be convincingly broken. On the other hand, it is also possible the dominant uptrend can resume. To reaffirm the next major rally toward new all-time highs the markets and stocks in question need to clear above the left/right shoulders and preferably above the heads.
Nasdaq Composite Index (COMPQ – 11,190.32)
Left and right shoulders = 10,839.93-11,126.04 and 11,299.53
Neckline = 10,762.71-10,728.03
Nasdaq 100 Index (NDX – 11,438.87)
Left and right shoulders = 11,069.26-11,128.24 and 11,566.34
Neckline = 10,855.06-10,945.22
Apple, Inc. (AAPL – 115.54)
Left and right shoulders = 116.04-128.79 and 120.50)
Neckline = 108.19-110.00
Microsoft Corp. (MSFT – 208.78)
Left and right shoulders = 215.86-217.12 and 214.84
Neckline = 193.08-201.24
Amazon.com, Inc (AMZN – 3,156.13)
Left and right shoulders = 3,344.29-3,380.31 and 3,349.89
Neckline = 2,888-3,083.98
Facebook, Inc. (FB – 272.42)
Left and right shoulders = 245.19-247.65-278.89 and 279.16
Neckline = 247.43-262.64
Alphabet Inc. – Class A (GOOGL – 1,535.12)
Left and right shoulders = 1,576.36-1,587.05 and 1,573.66
Neckline = 1,453.00-1,493.02
Alphabet Inc. – Class C (GOOG – 1,531.44)
Left and right shoulders = 1,577.13-1,586.99 and 1,584.08
Neckline = 1,454.03-1,497.36
Netflix, Inc. (NFLX – 495.99) 1.88% market-cap of NDX/QQQ
Left and right shoulders = 501.00-510.82/520-522
Neckline = 466.55-471.30