Technology (QQQ) and Semiconductors (SMH) Intermediate Momentum Patterns Imply a Breakdown

August was a volatile month for the major averages, only the second down month of the year. There were eleven days when the S&P 500 moved more than 1% intraday and the Nasdaq had thirteen. The S&P even had three down days where they closed over 2.5% lower, while the Nasdaq closed lower by 3% three times. This type of daily movement clearly shows risk is on the rise. For the past 25 days ending 9/3, the S&P 500 average daily change is 1.07% and the Nasdaq Composite average daily change is 1.24%. Gone are the days from a year ago when the S&P 500 average daily change was 0.37% and the Nasdaq Composite average daily change is 0.46%.

With the summer months behind us, I believe volatility is here to stay, a good time to pay attention to your investments, not a time to be complacent.   Increased volatility, no trade deal with China, and the talk of a recession have traders nervous. Not all major averages are close to their new highs. The Russell 2000 (IWM) and Transports (IYT) are well below their highs and continue to lag, which remains disturbing. On the other hand, short term sentiment is showing high levels of pessimism, (a contrary indicator), and sometimes implies a good buying opportunity is near.

Where are we right now?

The Dow, S&P 500 and Nasdaq have stalled at overhead resistance, only a few percent under their all-time highs. Intermediate and long-term trend chart patterns are in jeopardy of a breakdown if support is broken. Keep in mind September historically can be a troublesome month for the stock market. A bumpy ride may be ahead. If institutions decide to sell their holding before the end of the quarter, a potentially sharp, significant decline could begin. Interestingly, the Nasdaq 100 (QQQ) support at 183.00 on the weekly chart is only 2 points above the 60-minute chart of 181.00. This support level has held since 8/15 with a low at 181.16, and on 8/23 with a low at 181.56.

Where do we go from here?  Watch the tape for strength or weakness in Technology

Figure 1: Invesco QQQ (Nasdaq 100 Index) Weekly Price, and Trend Channels (top), and the 12-26-9 Weekly MACD (bottom)

The top part chart shows the weekly Invesco (QQQ)¹, an exchange-traded fund based on the Nasdaq 100 Index, and its active trend channel (purple line) (***See below for top holdings). The QQQ has led the major averages in 2019 making a new all-time high at 195.78 on 7/22 (red circle). However, QQQ failed to reach the upper channel of 206.00 and then pulled back toward the middle channel and the uptrend line. (blue).   If the QQQ holds above the middle channel, at 183.00, key support, the rally is likely to test the July high. On the other hand, if QQQ closes below 183.00 for two days or a weekly close below 183.00, then the uptrend will be broken. The intermediate trend would shift from up to down and I would expect selling pressure and a more serious decline to occur, potentially to the bottom channel at 160.00 where potential buyers are likely to step in and buy.

The bottom half of the chart is MACD (12, 26, 9 week), a measure of momentum. MACD is now on a sell, overbought, and above 0. After rising to an overbought condition confirming the high this past April, MACD has turned down with a bearish negative divergence. QQQ made a higher high, but MACD a lower high, failing to confirm, giving a warning sign of weakening momentum. Another warning sign the technology sector could have trouble is that on August 23 the weekly relative strength shifted to the S&P 500 (SPY), after six weeks of the QQQ leading in relative strength.

I recommend keeping an eye on the top holdings in the QQQ (see below footnote***) as a hint which way the breakout or breakdown of the trading range will develop. The top two holdings of QQQ, Microsoft (MSFT) and Apple (AAPL) remain in a weekly uptrend based on price. However, if they close below their 8/5 low of 130.78 and 192.58 respectively, I would expect more selling and potentially an even larger decline. In August Facebook (FB) and Amazon (AMZN) generated a MACD sell and have already broken their weekly uptrend. On the other hand, if the top holdings remain firm and go higher, this will help the QQQ remain above the weekly middle channel of 183.00. This could be the fuel to extend the advance for another chance at challenging the 7/22 high and potentially making a new all-time high.

¹ The QQQ includes 104 of the largest domestic and international nonfinancial companies listed on the Nasdaq. As of 9/3/19, the top holdings are Microsoft Corp (MSFT) 11.45%, Apple (AAPL) 10.41%, Amazon.com Inc. (AMZN) 9.48%, Facebook Inc. (FB) 4.88%, Alphabet Inc. Class C (GOOG) 4.52%, and Alphabet Inc. Class A (GOOGL), 3.97% totaling 44.71%.   Source://www.etf.com/QQQ#overview

Figure 2: Van Eck Vectors Semiconductor (SMH) Weekly Price, 50 Week Moving Average (top), and the 12-26-9 Weekly MACD (bottom)

The top part chart shows the weekly Van Eck Vectors Semiconductor (SMH)² a concentrated, mostly US-based ETF of mega-cap semiconductors companies, its 50-week moving average (in pink) and its key trend line (purple line). SMH has been a strong ETF, outperforming the Nasdaq in 2019, up 29.00% through 9/3. SMH peaked on July 24 at 123.31.

On the positive side, the price trends of SMH remain in an uptrend from its December 2018 low. SMH is also above its 50-week moving average (103.29). As long as the uptrend remains in effect, technology stocks are likely to avoid a serious decline.     Many times, Semiconductors give a warning before investors shift assets out of the technology sector. Be alert to a trend change if SMH closes below 107.09, the first warning sign. A close below the 50-week moving average would confirm the intermediate trend shifting to negative and could be a catalyst for further weakness.

The bottom half of the chart is MACD (12, 26, 9 week), a measure of momentum. MACD is now on a sell after turning down with a bearish negative divergence. SMH made a higher high, but MACD failed to confirm, making a lower high. This pattern is the same as Nasdaq 100 (QQQ), showing weakening momentum but price trends are still favorable.

Summing Up:

I recommend you review your investment portfolio. If you are overweight in Semiconductors and or technology stocks, I suggest you lighten up your exposure now looking for a safer opportunity in the coming months. Volatility is likely to continue until the recent trading range is broken to the upside or downside. The technology sector chart patterns are giving warning signs a decline is forthcoming. However, with our U.S. Equity model on a sell, and the inability for the stock market to get through overhead resistance and breakout to the upside, attempting several times in August, it’s wise to wait a little longer before taking a bullish stance on the market.

I would love to hear from you. Please call me at 516-829-6444 or email at bgortler@signalert.com to share your thoughts or ask me any questions you might have.

² The SMH includes 26 US-listed companies. As of 9/3/19, the top holdings are Taiwan Semiconductor Manufacturing Co. ADR (TSM) 12.25%, Intel Corporation (INTC) 11.06%, Texas Instruments Inc. (TXN) 6.05, Micron Technology 5.68% (MU), and Nvidia 5.31 (NVDA) totaling 40.35%.   Source: https //www.etf.com/SMH#overview

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******Article first published in Systems and Forecasts on September 4, 2019

Disclaimer: Although the information is made with a sincere effort for accuracy, it is not guaranteed that the information provided is a statement of fact. Nor can we guarantee the results of following any of the recommendations made herein. Readers are encouraged to meet with their own advisors to consider the suitability of investments for their own particular situations and for determination of their own risk levels. Past performance does not guarantee any future results.

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Bonnie S. Gortler

Bonnie Gortler, Consultant, Coach, and Author specializing in Wealth and Well-Being, is a successful stock market expert who has been instrumental in managing multi-million-dollar client portfolios within a top-rated investment firm during her over 35-year corporate career. As the author of “Journey to Wealth,” Bonnie has made it her mission to share the importance of risk management and how to enjoy real financial well-being by applying the technical and mental sides of investing. Bonnie has an M.B.A. and is a certified life coach. It is through her love of coaching, consulting, blogging, and social media that she creates change in the lives of many and inspires people from around the world. Bonnie is fully committed to your personal growth and development as she shares her winning spirit and powerful techniques with you. Visit BonnieGortler.com to gain tips and insights about investing, personal development, and inspiration through her articles on Wealth and Well-Being.
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