Nothing tells the story of supply and demand better than the Money Flow Index. Demand through January for XLK was at exceedingly high levels, but it has declined over the past several trading sessions.
Other indicators confirm the declining demand. The relative strength index hit its previous high before the August selloff and has begun to retreat.
Stochastics are rolling over from an extended overbought period. The MACD signal line is about to make a bearish crossover, and the histogram looks to be heading into negative territory. Our +/- directional indicator at the bottom of the chart shows positive direction has rolled over from a high and negative direction has just turned upward.
Everything on this chart shows a tiring trend about to decline. The question is how far.
We have an ascending triangle formation by the upper and lower trend lines. Generally, this indicates fewer and fewer sellers as the lower trend line ascends. Typically it's bullish.
From the lows in August, the lower trend line was established by the late September low. That lower trend line was tested again at the December low and proved true.
On the upper trend line established from the July highs we have only had one major test at the October highs.
Although, price may appear to have broken out of the ascending triangle pattern, we may not have a true breakout but rather an overextension based entirely on AAPL's earnings.
The pattern is still wide and typically would have another test of the lower trend line before a true breakout. Additionally, a true break would not have an array of declining indicators.
So, to answer the question of how far, a retest of the lower trend line would likely be just north of $25.25 (based on trend line trajectory and rate of change). That price level would also have the support of the 200-day moving average. A bounce off the lower trend line could spring XLK into a true breakout of the $26.50 level.
XLK isn't far away from its precrash, October 2007 high of $28. If anything is going to go into new realms of an all-time high, it will be tech. Keep your eye on Apple. As Apple goes, so goes tech.
At the time of publication, Gillie had no position in XLK.
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