It's always important to pay attention to market leaders, as they are usually the last to break down and the first to recover in a market cycle. Stocks will often show signs of weakness while the market leaders continue to prop up the indexes and paint a picture of market strength. Rallies on dwindling participation are generally destined to fail, and once the market leaders falter, this often signals the start of a reversal. The general markets will rarely make a sustained move without the cooperation of market leaders.
The leaders of the last bull market were dubbed the "Four Horsemen"; in this case, Apple (Nasdaq:AAPL), Research in Motion Limited (Nasdaq:RIMM), Google Inc. (Nasdaq:GOOG) and Amazon.com (Nasdaq:AMZN) led the charge. While market leaders typically don't carry over to the next bull market, tech stocks have been holding up much better than the general markets over the past few months, and these stocks are still worth watching. With the current rally starting to show signs of weakness, it may be a good time to step back and see where the Four Horsemen of tech are in the grand scheme of things, and see if we can glean any clues as to where the markets are headed. In order to get a better understanding of the larger picture, we are departing from our usual use of daily charts and switching over to weekly charts.
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The Apple of the Market's Eye
Apple is generally regarded as one of the strongest stocks of the last market cycle, and it fits any definition of a market leader. While AAPL has been performing very well over the past few months, rallying from the $80s to more than $140, it is still well short of its all-time high. It's very possible that AAPL is setting a lower high in this area, which would be followed by a correction or resumption of the downtrend. Signals on weekly charts should not be ignored, as they are less prone to the noise of day-to-day price movements.
Research in Motion Pulls Up Lame
Research in Motion Limited suffered through the sharpest decline of the Four Horsemen stocks, dropping more than 70% from its bull market highs. RIMM formed a strong double bottom shown in the green box on the weekly chart, although the daily chart is littered with violent moves in both directions. Much like AAPL, RIMM was only able to retrace a portion of the decline, and has already begun a correction after setting a lower high. The question is, will RIMM find support near the double-bottom base and resume its trek toward prior highs, or is this lower high portending new bear market lows? (For related reading, see Multiple Time Frames Can Multiply Returns.)
Investors Searching for Google Bottom
The chart for Google is similar to that for AAPL in that it has made a series of progressively lower highs. GOOG appears to be stalling at a price point ($440) that has proved to be a critical level in the past. GOOG could easily shed $100 of its share price even if this move ends up being a correction to the recent rally.
Amazon Booking Strong Stock Prices
Amazon.com has been the strongest of the four stocks over the past year, rallying more than 140% from its October lows. AMZN retraced a large portion of its bear market correction, and, at $110, is not too far from its all-time highs. However, in the near term, it appears that AMZN is coming under pressure, after testing a prior pivot high near $90. It could be setting a lower high here as well, which could lead to much lower prices.
In stepping back and reviewing the above charts, it appears that these leaders are all at logical areas for selling pressure to drive prices lower. All appear to be in the process of setting lower highs on the weekly chart, but they also are well above their recent lows. It is too early to know if they are in the process of resuming the larger overall bear downtrend, or of this is the first correction in an early bull market. If this is simply a correction of the recent rally, then we need to watch for higher lows to form in the next several weeks at levels above the November lows. As traders, we must keep an open mind and watch the charts to see what unfolds.
At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.