SPX Technical:
S&P 500 Index (SPX) has declined -35.41% from of 3,393.52 (2/19/20) to a recent low of 2,191.86 (3/23/20). In the past month, a sharp and impressive near-term oversold rally of +31.36% is now approaching a critical phase. That is, SPX is nearing a key test of intermediate-term resistance at 2,945.5-3,012 or the crucial 61.8% retracement from the Feb-Mar 2020 decline as well as the pivotal 200-day ma. The ability to breakout is technically significant as this signals a retest of the Feb 2020 all-time high. On the other hand, an oversold condition has developed into this rally and failure to clear above this intermediate-term resistance warns of a consolidation. The consolidation may take the form of another higher-low pattern. This alleviates an overbought condition and sets the stage for the next sustainable intermediate-term rally.
XLK Technical:
S&P 500 Technology sector (XLK) has also declined -33.50% from its 2/19/20 all-time high (102.40) to a recent 3/23/20 low (68.10). XLK has relatively outperformed SPX during its Feb-Mar 2020 bear decline (-33.50%) and has been an in-line performer against SPX during its 3/23/20-present oversold rally (31.67%). Like SPX, XLK is also approaching significant intermediate-term resistance at 89-92 coinciding with the 61.8% retracement from Feb-Mar 2020 decline, 4/17/20 high, top of its 2018 broadening pattern, and the Jun 2019 uptrend). A convincing breakout above this resistance signals the next rally possibly to retest its all-time high (102.40). However, repeated failures to surpass this key resistance (89-92) warns of the next consolidation to initial support along the low-to-mid-80s, and below this to intermediate-term support in the mid-to-high 70s. This would represent another buying opportunity.
S&P 500 Sectors:
Over the past 8 weeks or since the 2/19/20 all-time highs, S&P 500 Technology Sector (XLK) has relatively outperformed the market (SPX) and its S&P peers as evidenced by its position within the Leading Quadrant of the Relative Strength Graph (RRG). However, XLK has now slipped from the Leading Quadrant to the Weakening Quadrant. This suggests the start of a normal correction. Typically, a technically strong S&P sector that moves briefly into the Weakening Quadrant suggests an overbought condition that is need of consolidation. However, the duration and the magnitude of the decline into the Weakening Quadrant will help determine if this is a normal correction, a deeper correction, or the potential for a major top. Since the S&P 500 Technology is a secular/structural growth sector this is likely a normal correction that will return to its leadership role within the Leading Quadrant.
S&P 500 Technology Industries:
There are six (6) major S&P 500 Technology Industries situated within the S&P 500 Technology Sector. However, only one of the six S&P Technology Industries (S&P 500 Software - $GSPSW (+9.70% YTD)) is currently residing in the Leading Quadrant. Another S&P Technology industry is situated within the Improving Quadrant (S&P 500 Communications Equipment (-9.70% YTD)). Within the Weakening Quadrant is the S&P 500 Technology Hardware, Storage and Peripherals (-5.78% YTD). Three Technology Industries fall within the Lagging Quadrant (S&P 500 Electronic Equipment, Instruments & Components (-23.24% YTD), S&P 500 IT Services (-11.01% YTD) S&P 500 Semiconductors & Semiconductor Equipment (-3.78% YTD)).
A brief review of the RRG chart suggests the current leadership within the Technology sector is mixed as only two (2) strong S&P Technology Industries currently residing within the Leading and Improving Quadrants but four (4) S&P Technology Industries are currently in the Weakening and Lagging Quadrants. This mixed reading further supports the basis for a near-term correction within the S&P 500 Technology Sector (XLK).
S&P 500 Technology Stocks
XLK is currently comprised of 51 S&P 500 Technology names. Six (6) Technology names are situated within the Leading Quadrant (i.e., NVDA, MSFT, ADBE, VRSN, CDNS, and PYPL). Thirteen names (13) names reside in the Improving Quadrant (i.e., XLNX, CSCO, IBM, KLAC, KEYS, TXN, ORCL, ADI, MXIM, MSI, SNPS, INTU, and FIS). The remaining 32 S&P 500 Technology names are either in the Weakening or the Lagging Quadrants.
This warns of narrowed breadth within XLK as evidenced by more than half of the S&P 500 Technology names requiring additional technical work before they can return to leadership roles. This further suggests investors and traders must be stock selective within the S&P Technology sector. A near-term correction in a secular/structural growth arena such as XLK represents another buying opportunity.
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