High-flying technology stocks have propelled the major indexes to all-time highs, just months after capitulating by around 40% during the coronavirus-induced selloff. Investors have cheered eye-popping levels of economic stimulus and flooded into companies that facilitate the growing shift to online shopping, remote working, and streaming entertainment, which has accelerated throughout the pandemic.
- Technology stocks trade almost 80% above their March pandemic selloff low.
- The ProShares UltraPro Short QQQ (SQQQ) closed above a falling wedge pattern on record volume that may see resistance tested at $41 and $57.
- A similar technical setup in the Direxion Daily Semiconductor Bear 3X Shares (SOXS) may result in a test of resistance at $100 before a possible run-up to $200.
However, the sector came under heavy selling pressure late last week as traders booked profits in many of the names that spearhead the group amid growing concerns over lofty valuations and unsophisticated investors ramping up stock prices. "I don't think the tech companies should be where they are today, I think it's unrealistic valuations, what we have, whether it's the new wave of Robinhood traders that keep it going," SBP Management president and CIO Michael Danov told Kitco.
Those who think that further profit-taking may be in store for technology stocks should consider trading these two technology inverse exchange-traded funds (ETFs) that move in the opposite direction to the index they track. Below, we take a closer look at each fund and explore several trading possibilities.
ProShares UltraPro Short QQQ (SQQQ)
With net assets with over $1 billion, the ProShares UltraPro Short QQQ (SQQQ) seeks to return three times the inverse daily performance of the NASDAQ 100 Index – a tech-heavy benchmark that excludes financial stocks. The fund bets against sector heavyweights Apple Inc. (AAPL), Amazon.com, Inc. (AMZN), and Microsoft Corporation (MSFT), with the trio comprising over 30% of the underlying index. Active traders can easily enter and exit positions, given the ETF's daily turnover of around 24 million shares and a modest 0.16% average spread. Traders should be aware that returns greater than one day may deviate from the advertised leverage due to compounding effects. As of Sept. 7, 2020, SQQQ yields 4.73% and has fallen nearly 50% over the past three months.
After plumbing a new all-time low under the psychological $20 level last week, the fund reversed course on record volume to close above the upper trendline of a six-month falling wedge pattern. Moreover, the relative strength index (RSI) climbed above the oversold threshold, indicating a shift in momentum. Those who enter around these prices should look to book profits at either $41 or $57 – both key overhead resistance areas. Limit downside risk by placing a stop-loss order under the recent all-time low at $19.55.
Direxion Daily Semiconductor Bear 3X Shares (SOXS)
Launched a decade ago, the Direxion Daily Semiconductor Bear 3X Shares (SOXS) holds assets under management (AUM) of $128 million and aims to return three times the inverse daily return of the PHLX Semiconductor Sector Index. The ETF effectively offers short exposure to some of the leading names in the semiconductor industry, including NVIDIA Corporation (NVDA), QUALCOMM Incorporated (QCOM), and Broadcom Inc. (AVGO). An average daily dollar volume of almost $700 million, coupled with tight penny spreads, provides ample liquidity while minimizing transaction costs. Trading at $42.73 and offering a 7% dividend yield, the fund is trading 49.42% lower since early June as of Sept. 7, 2020.
Not surprisingly, the SOXS technical picture looks remarkably similar to that of SQQQ. Price broke above the top trendline of a broad falling wedge pattern Friday on above-average volume, increasing the probability of further follow-through buying in subsequent sessions. Traders who take a long position here should set an initial profit target at resistance around $100. Those who expect a deeper pullback in the tech sector may want to look for a run-up to $200, where price finds a confluence of resistance from the February swing low and 38.20% Fibonacci retracement level. Protect capital with a stop placed under the $34.79 September low.
Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. These levels are 23.6%, 38.2%, 61.8%, and 78.6%.
Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.