The recent pullbacks in mega-capitalization tech stocks have now gone far enough and lasted long enough to trigger chart signals warning investors that at the very least, don’t buy these stocks lower.
Chart signals are informed by the widely followed 50-day simple moving average, which many Wall Street uses as a guide for the short- to medium-term trend. The strongest warnings apply to three of the four largest companies by market capitalization, which have helped the broader stock market rally since the March lows: Microsoft Corp. MSFT,
Amazon.com Inc. AMZN,
and the parent company of Google Alphabet Inc. GOOGL,
as well as the Invesco QQQ QQQ exchange-traded fund,
which follows the NDX Nasdaq-100 index, heavy in technology,
and the S&P 500 SPX Index,
Mark Arbeter, president of technical analysis at Arbeter Investments LLC, said many of the leaders in “stacked and crowded” mega-caps are in “precarious” technical positions.
“For some of the clues and individual names, the 50 days has flattened, and for others it seems to be backfiring,” Arbeter said. “This, along with their graphical patterns and sentiment, suggest that the medium-term outlook has turned neutral or even bearish.”
Microsoft’s stock closed 1.2% lower at $ 200.39 on Friday, marking the ninth consecutive session it has closed below its 50-day moving average, or 50-DMA. If that wasn’t enough to scare off buyers, or enough to embolden bears, the 50-DMA started rolling on September 11 and has accelerated lower since then.
At Friday’s close, the 50-DMA was at $ 210.730, or 27.8 cents below Thursday’s closing 50-DMA at $ 211.008, or 19.9 cents below Wednesday’s $ 211.207, according to the data. from FactSet.
On Wednesday, the 50 DMA drop even acted as resistance, capping the stock’s attempt to rally at the open. That’s a change from late July to mid-August, when a rising 50-DMA served as support.
As JC O’Hara, chief market technician at MKM Partners, said in a note to clients this week, it’s the slope that matters.
“We recognize that moving averages are absolute levels to watch during its process,” O’Hara wrote. “In our work, we find it more important to monitor the slope of the moving average, not necessarily the level of the average.”
With that in mind, the 50-DMA slopes for Amazon and Alphabet stocks turned negative on Thursday and fell further on Friday.
Amazon’s 50-DMA fell $ 4.554 on Friday after slipping $ 1.448 on Thursday, while Alphabet’s 50-DMA fell $ 1.351 on Friday after falling 33.1 cents on Thursday.
Apple stock closed below its 50-DMA on Thursday for the first time since April 21, then accelerated lower with a 3.2% drop on Friday to a seven-week low.
With the stock falling 17.2% so far this month, it was on track for the biggest monthly drop since falling 18.4% in November 2018.
The triple-Q closed below the fund’s 50-DMA on Friday for the second day in a row and for the third time last week. As the 50-DMA increases further, it won’t be for long. It only increased by 0.094 points on Friday, after advancing 0.207 points on Thursday and 0.360 points on Wednesday.
The QQQ has fallen 9.5% so far in September and is currently heading for the worst monthly performance since falling 11.5% in November 2008.
Meanwhile, the S&P 500 had fallen intraday below its 50-DMA last Monday and Thursday, but recovered to close above. The 50-DMA finally broke on Friday, and the index closed below for the first time since April 23. See Market Snapshot.
The 50-DMA is still up, but it flattened, to an increase of 3.348 points on Friday from gains of 3.742 points on Thursday and 4.803 points on Thursday.
While it doesn’t necessarily scream to sell these stocks, it should give investors a reason to pause before buying the downside.