Avoid FANG Stocks Until Summer

FANG stocks sold off with the broad market into February, caught in a profit-taking wave after months of positive price action. They've bounced strongly off monthly lows in the past two weeks but are unlikely to reward newly minted shareholders with breakouts. More likely, the fabulous quartet has entered a consolidative phase that limits gains into the third quarter, making it tough to recommend opening or adding to positions.

Amazon.com, Inc. (AMZN) and Netflix, Inc. (NFLX) have bounced higher than Apple Inc. (AAPL) or Facebook, Inc. (FB), but don't be fooled by minor thrusts to new highs. V-shaped patterns rarely generate new trends immediately, often reversing as soon as weak hands forget their discipline and take exposure. Deep pullbacks can follow, often testing prior lows before strong-handed buyers retake control. (See also: Hedge Fund Billionaires Bullish on FANG and Retail Stocks: 13F.)

Amazon stock broke out above a six-year rising trendline in January 2018 and surged higher, gaining more than 300 points in just five weeks. It then dropped 230 points in six sessions, trapping late-to-the-party trend followers. The subsequent bounce exceeded the prior high by five points and stalled out, ready to generate a fresh trend advance or downswing that traps complacent bulls.

The sell-off found support at the 50-day exponential moving average (EMA), which has jumped nearly 50 points to $1,330 in the past nine sessions and will soon reach the .618 Fibonacci rally retracement at $1,350. That harmonic zone looks like a minimum target for the next pullback, if it comes, with a bounce generating a strong uptick and breakout while a failure would signal the next leg of a correction that targets $1,100. (For more, see: Amazon Launches Its Own Line of OTC Drugs.)

Netflix shares broke out above October resistance at $205 in early January and took off on a trend advance that added more than 80 points. The decline into February relinquished 50 points, ahead of a bounce that stalled at range resistance earlier this week. The stock fell to a four-day low on Thursday, posting a minor sell signal that could presage a trip down to $250 in the coming weeks. 

The Jan. 23 gap between $228 and $248 is partially unfilled and could act as a magnetic target, bringing the Feb. 9 low back into play. Alternatively, a narrow range consolidation lasting another one to three weeks could negate the bearish scenario, yielding a secondary breakout into the $300s. Whatever the outcome, there's no good reason to jump on board right here, given volatile cross-currents. (See also: The Top 3 Netflix Shareholders.)

Apple stock plunged from an all-time high to a four-month low, bouncing at September support near $150 on Feb. 9. It has squeezed short sellers in the past week, carving a vertical bounce that has stalled at the .786 Fibonacci sell-off retracement level just above $170. A week of narrow range action has failed to move the needle, establishing a deadlock that favors a downturn into the Feb. 15 gap between $167.50 and $169.50.

That level has aligned with fourth quarter range support and the 50-day EMA, establishing a line in the sand that bulls need to hold at all costs or risk a slide back to the monthly low near $150. On-balance volume (OBV) has taken a major hit since topping out in November, signaling the reluctance of institutions to add exposure, given the company's slowing growth curve. The recent bounce has failed to alleviate this bearish divergence. (See also: Apple Wants to Buy Cobalt Directly From Miners: Report.)

Facebook shares have carved the weakest pattern in the quartet, turning sharply lower after posting an all-time high at $195.32 on Feb. 1. The stock failed a channel breakout two sessions later, dropping nearly 30 points to a four-month low at the 200-day EMA. The subsequent bounce stalled under the 50-day EMA a week ago, with that level now aligned at the 50% sell-off retracement.

The recovery effort could reach stronger resistance in the $180s or roll over here, generating a test of the corrective low. The stock has not traded under the 200-day EMA in 14 months, adding importance to that support level, with a breakdown opening the door to $150. Given the high stakes, informed market players will likely keep their powder dry, allowing other traders to risk their hard-earned capital. (For more, see: Why Facebook's Rally Is Lagging the Techs.)

The Bottom Line

FANG stocks have bounced off corrective lows but are unlikely to enter new uptrends in the coming weeks. More likely, they'll carve range-bound patterns into the second half of 2018, working off overbought technical readings following months of higher prices. (For additional reading, check out: Facebook and Google's Days Are Numbered: Soros.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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