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Chart Advisor: Big Tech Woes

Investopedia

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Investopedia
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Monday, January 11, 2021

1/ Tech companies watch profit takers pare positions 

2/ Nasdaq 100 shows warning signals 

3/ Swing in speculative behavior 

4/ The bottom line

1/ Tech Companies Watch Profit Takers Pare Positions 

As stocks showed signs of profit taking today, the Nasdaq 100 (NDX) gave up more growth than other benchmark indexes. In many cases, components of the index are lower than where they started a month ago. This action seems to show the depth of the commitment to sector rotation by fund managers. 

The chart below shows the price action for four stocks in particular, Facebook (FB), Amazon (AMZN), Twitter (TWTR), and Alphabet (GOOGL). Although stocks in general have had a good December and attracted investors during the period known as the Santa Claus rally, these stocks haven’t quite followed that trend.  

These stocks, along with several others, are overly influential on the rest of the market. That’s because they are over-represented in the many ETFs they are held in. The most potent example of these is Alphabet (GOOGL), which is listed in over 400 different ETFs. If stocks like these are trending lower, it will be difficult for the Nasdaq 100 index to continue higher.  

2/ Nasdaq 100 Shows Warning Signals 

A close look at Invesco’s Nasdaq 100 ETF (QQQ) shows signs of weakness appearing. These are likely driven by the profit taking evident in many of the component stocks (as previously mentioned).

The chart below shows that the Relative Strength Index (RSI) indicator is making a bearish divergence at the same time the price is completing an evening star candlestick formation. Neither of these guarantees that the price will trend lower. However, the fact that these signals appear in combination at the end of a two-month bullish trend puts the weight of evidence on the probability that they will do exactly that in the days ahead.

3/ Swing in Speculative Behavior 

The strongest speculative move in recent days however, has been Bitcoin (BTCUSD). Perhaps it is no surprise that a wave of profit taking would hit sometime soon. It is interesting to note that today’s trading volume is the highest on record since the pandemic panic last March.  

But Bitcoin isn’t the only asset selling off strongly today. The chart below shows that traders in Tesla (TSLA), the other speculative darling, clipped off a significant chunk of the share price today, filling Thursday’s after-hours gap. This corroborates the idea that investors and traders are actually taking profits, rather than panic selling, because the fortunes of Bitcoin and TSLA shareholders are otherwise unrelated fundamentally. For further confirmation of this idea, look no further than shares of General Motors (GM), which gained a healthy four percent today.  

This last chart is probably the best evidence that any selling is likely to be temporary and that investors are still on the lookout for opportunity throughout 2021. Just where that opportunity will manifest may be difficult to tease out with so many confusing headlines, but chart readers will find the task a little easier so long as they concentrate on issues showing relative strength.

 4/ The Bottom Line 

Despite many stocks selling off today, and the resulting weakness that the charts seem to display in several Nasdaq 100 component stocks, the moves are likely temporary. Investors still seem eager to buy shares so long as they can find a narrative that interests them. 

Originally Published on January 11 , 2021

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