As global investors reallocate capital from low-yielding assets such as commodities to higher-risk segments, active traders are seeking profitable opportunities. One sector of the equities market that has benefited from investors' risky appetites is technology. In the article below we’ll take a look at several tech charts and identify why traders may want to reconsider opening new positions at these levels. (For related reading, see: Recent IPOs Suggest A Pullback Is Near).
Technology Select Sector SPDR Fund
One of the most common technical indicators used by active traders for gauging overbought and oversold conditions is the Relative Strength Index (RSI). Generally speaking, RSI readings over 70 suggest an asset is overbought and could be nearing an inflection point. Taking a look at the chart of the Technology Select Sector SPDR Fund (XLK), you can see that the RSI has notched several highs above 70 over the past couple of months, which suggests that the upward momentum could be running out of steam. From the perspective of an active trader, this is also an interesting chart because each successive move has not also coincided with the RSI notching new highs. This type of negative divergence is a common signal used by traders to suggest the bulls are losing conviction that an asset is ready for a pullback. In this case, it appears as though the entire technology sector may have gotten ahead of itself and could be primed for a move lower. (For more, see: 3 Technology ETFs To Watch)
For anyone who follows the financial news, you’ve probably heard that Amazon.com, Inc. (AMZN) has broken above the psychological $1,000 level for the first time. While the company continues to disrupt nearly every business area it enters, technically speaking, the momentum is starting to show signs of slowing. Taking a look at the chart of AMZN below, you can see that the RSI is trending downward while the price of the stock continues to climb. This negative divergence is an indication that the price surge is on its last legs. The overbought readings and downward slope of the RSI could be a leading indicator that the price is readying for a move toward the support of its 50-day moving average, which is currently trading at $918.18. (For more, see: Amazon's Shares Near $1,000 Mark).
Another popular technology stock that gets lots of attention from the media is Alphabet, Inc. (GOOG). Taking a look at the chart below, you’ll notice a familiar pattern. The RSI has recently notched a series of readings above 70, which suggests that the stock is trading in overbought territory. Furthermore, the downward slope of the RSI while the price of the stock trades higher is an early signal that the buyers are losing conviction and that the price could be nearing a key turning point. Bullish traders will likely want to remain on the sidelines and wait for a pullback toward the 50-day moving average ($880.20) before opening a new position.
The Bottom Line
Technology stocks have been on an incredible run over the past several months, but the defined uptrends are starting to show signs of weakness. Overbought readings on the RSI along with periods of negative divergence suggest that the bulls are losing their conviction and that the price of key technology stocks could be primed for a significant pullback. (For more, see: Exploring Oscillators and Indicators)
At the time of writing, Casey Murphy did not own shares of any asset mentioned.