Tech stocks have been leading the charge higher over the past several weeks, but there are some warning signs that suggest that these stocks may be getting tired. While many stocks remain in healthy uptrends, some have experienced reversals on high volume that reek of distribution, which occurs when institutions selling their holdings (or "distribute") to retail traders. While an occasional distribution day is actually healthy for a stock, persistent distribution is the signal for aggressive traders to "get out of dodge".
F5 Networks (Nasdaq:FFIV) has been one of the strongest stocks this year, and remains in an uptrend on most time frames. However, the recent selling in October has taken on a sense of urgency, as FFIV dropped more than 10% in a few days. Volume was also up sharply; in fact, it was the highest trading volume of the past several months. While it is still much too early to assume FFIV has topped, the high volume reversal has greatly increased the odds that FFIV will at least enter a lengthy consolidation. FFIV is currently pausing near its 50-day moving average and appears to be rolling back over. This could lead to an eventual retest of the $80 level.
Akamai Technologies (NasdaqGS:AKAM) is another stock that has been experiencing some distribution. Notice the subtle shift in its volume pattern over the past few months. Trading volume increased on the weaker days, while dying down as it traded higher. AKAM reversed from the $50s and is churning under its 50-day moving average. While technically speaking AKAM is testing a support level, the odds are favoring another move lower.
Citrix Systems (Nasdaq:CTXS) has also experienced some urgent selling recently. CTXS had a strong breakout in late July as it cleared a solid base it had been building for most of 2010. The breakout held well above its initial gap, and CTXS continued to rally over 20 points in total. However, the recent selling volume in CTXS has dwarfed the breakout volume, and couldn't really be classified as profit taking. This type of selling often takes time to be absorbed, and even though CTXS will likely hold on to its original breakout, it may take some time to repair the recent damage.
Much like CTXS, Salesforce.com (NYSE:CRM) has seen its recent selling volume dwarf the volume accompanied by the breakout in late August. CRM has basically rallied from its 2009 breakout area near $34 to current levels without any major corrections. There have been a few two- to three-month pauses, but it could be time for CRM to pause. The recent selling occurred on the highest volume since its rally began and that is usually a pretty obvious warning sign. CRM is consolidating under its 50-day moving average and also testing an uptrend line that has held for several months. Traders should focus on these two areas in the immediate future to see if CRM can transition to a sideways consolidation, rather than a deeper correction.
While all of these stocks remain in a technical uptrend when viewed on longer term charts, the recent selling should not be dismissed. It takes time for stocks to absorb institutional selling pressure, and despite overall market strength, it appears that some of these stocks still have much consolidation ahead of them before attempting to resume their uptrends. Traders should monitor not only the important support and resistance levels left behind by the recent selling, but also volume patterns to see if traders begin to show less urgency on weak days, and more aggression on stronger days. The markets are in a constant state of rotation, and it could be that these tech stocks are ready to take a breather.
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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.