Think the selloff in tech is over? Think again.
Large technology stocks have been under substantial pressure in the last two weeks, correcting hard after a strong start to 2017. By themselves, the "FAANG" stocks -- the group made up of Facebook (FB) - Get Facebook, Inc. Class A Report, Amazon.com (AMZN) - Get Amazon.com, Inc. Report, Apple (AAPL) - Get Apple Inc. (AAPL) Report, Netflix (NFLX) - Get Netflix, Inc. (NFLX) Reportand Alphabet's (GOOG) - Get Alphabet Inc. Class C Report (GOOGL) - Get Alphabet Inc. Class A Report Google -- lost more than $126 billion in market value in the two trading sessions leading up to this week.
That's a drop that's been hard for most investors to miss this month.
Big tech clearly isn't done taking a beating quite yet: As I write, the Nasdaq Composite Index is down approximately 1% in Thursday's trading session, more than 10 times the price dip seen in the less tech savvy Dow Jones Industrial Average.
The tech selloff's next victim might be tech giant Alphabet Inc.
In spite of the recent dip in tech, 2017 has been a pretty great year to be a shareholder in Alphabet. This stock is up nearly 21% since the calendar flipped to January. An important part of Alphabet's persistent strength is the fact that it made it through the recent drop in its peer group relatively unscathed:
Unfortunately for Alphabet bulls, the price action is suggesting that the recent relative strength in Google's parent company could be about to change. To figure out what's happening in Alphabet, we're turning to the charts for a technical look.
In case you're unfamiliar with technical analysis, here's the executive summary: Technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
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Here's the technical take on Alphabet's chart:
After rallying since late last fall, Alphabet is beginning to look "toppy" -- at least in the short term.
That's thanks to a head-and-shoulders top, a classic bearish reversal setup that signals exhaustion among buyers. The pattern is formed by two swing highs that top out at approximately the same level (the shoulders), separated by a higher high (the head). The sell signal comes on the violation of Alphabet's neckline -- that's the $940 price level in GOOGL, or the $920 level if you're looking at GOOG.
The side indicator to watch in shares of Alphabet is price momentum, measured by 14-day RSI at the top of this stock's chart. Our momentum gauge has made a series of lower highs since the pattern started forming, signaling that buyers have been losing control since the beginning of May.
It's important to be reactionary here; if the neckline level in Alphabet gets violated, it's time to be a seller.
Just to be clear, that's not simply because of some drawing on a price chart. While price patterns are a useful way to identify trouble on a chart, the actual mechanics of the setup in Alphabet boil down to buyers and sellers.
The $940 support level in GOOGL is a place where there has been an excess of demand for shares since May; in other words, it's a spot where buyers have been more eager to step in and buy shares than sellers have been to take gains. That's what makes a breakdown below $940 so significant -- the move means that sellers are finally strong enough to absorb all of the excess demand at that price level.
If there's a silver lining to Alphabet's price setup, it's the fact that it's a relatively short-term pattern. A breakdown through the neckline implies 8% downside risk until shares are able to find their next support level. In other words, we're looking at another correction, not an outright crash.
If you're looking for an opportunity to "buy the dip" in Alphabet, it makes sense to wait and see how shares handle this key level first. Caveat emptor.
Alphabet's GOOGL shares fell 0.8% to $960.17 at Thursday's close.
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At the time of publication, author was long AAPL.