The FANG stocks (Facebook (FB) - Get Report , Amazon (AMZN) - Get Report , Netflix (NFLX) - Get Report and Google's parent Alphabet (GOOGL) - Get Report ) appear ready to lead the stock market again. This time they will lead it lower, however. You can add another big technology stock, Apple (AAPL) - Get Report , to the list, too. Four of these five stocks are making only corrective lower highs after forming impulsive declines from their recent peaks.
Chart one is the daily bar chart of Facebook, which shows this direction-changing impulse taking place in the first week of February. That brutal reversal took 17% off the stock's price in a waterfall slide. While much of that decline has been retrieved, the pattern off the Feb. 9 low is an up/down/up pattern, highlighted by the yellow box, known to Elliott Wave analysts as a zigzag, and suggests that a break of $96 is due next.
In addition, note that the stochastics are back to overbought conditions, again testing the 95% extreme that also occurred at the peaks in early February and early November. In both of those cases, the stock soon sold off dramatically. In the past two overbought examples, however, the stock's price was able to push above the upper Bollinger Band (purple dashed line), as well as above the (olive/gold) upper two-standard-deviation band, which controls 95% of normality. The current push so far has failed to close above the Bollinger Band and two-standard-deviation band. This is what our decision support engine's pattern-recognition algorithms call a bearish divergence sell signal, which signals underlying weakness.
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Chart two is the daily bar version of Google's parent Alphabet, which shows a pattern similar to Facebook's, and a similar reversal, but not from as severe of an overbought extreme. Notice here that while Facebook was rising above the three- and four-standard-deviation bands (orange and red bands), Alphabet had just barely made it above the two-standard-deviation band (olive/gold). Alphabet's stochastics have just touched a rare 99% extreme and have crossed down, actually ahead of Facebook's, as Alphabet's stock price made a similar up/down/up corrective zigzag.
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Chart three is the daily bar chart of Netflix, but it is zoomed in even more than the Alphabet chart. This shows the details inside the corrective yellow box, with the distinctive subwaves of three wave movements. Where Facebook's stochastics are just now cresting, and Alphabet's have just crossed down (red below green, and both red and green below the 90% threshold), Netflix's stochastics are leading the FANGs with a second cross, from a lower high than the early-March cross.
Apple's chart is the weakest of the big tech stocks we're looking at, as the rise off the February low hasn't even brought Apple's price up to the 200-day moving average, let alone to the upper two- or three-standard-deviation bands. Like the others, however, the stochastics have made lower highs vs. higher relative highs in prices, setting up a bearish divergence sell signal, and right up into the same pattern of a yellow-box zigzag. Also, note that the stock's price failed to break above the upper Bollinger Band.
These objective indicators are exactly what we use in our live-market Trading Room to guide members toward the right actions at the right time, to replace the emotional, ego-driven actions that most of the herd is making.
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Only Amazon has a different enough chart, and technical condition, to allow for much further upside. There are two targets being generated now if the stock is still headed higher. The first is $608, where wave C of the rise off the February low will equal 62% of wave A (a common Fibonacci relationship). The second is $648, where an equality between these two waves will be present. The pink box in the final chart shows that zone, but the proximity of the stochastics to the overbought 90% threshold mandates that this occur quickly, or Amazon will suffer from the same downward pressure as the first four FANGs. There's even an alternate pattern, which can't be ruled out yet, in which Amazon moves by itself to new all-time highs, but this is currently a low-probability outcome (until the stock closes above $675).
The bottom line is that with the ominous conditions of Apple and at least three of the four FANG members, the odds now favor a dramatic decline in these market leaders, which should weigh heavily upon the lesser components of most market indices. Avoid the bite of the FANGs, and take defensive actions now by exiting today, or at least using sell stops a couple of points below Thursday's closing prices.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.