The second quarter earnings from Google, Inc. (GOOG) and Microsoft, Inc. (MSFT) rocked the tech sector last week. Then Apple, Inc. (AAPL) reported its earnings after the close on Tuesday, which gave the market a pleasant surprise.
Many have been expecting or hoping that the cyclical technology sector would again take over leadership as it did in late 2011 and in 2012. In this trading lesson, I will be taking an in-depth look at Google, Inc. (GOOG), Amazon.com, Inc. (AMZN), Hewlett-Packard Co. (HPQ), eBay, Inc. (EBAY), and Apple, Inc. (AAPL). All of these stocks have a significant influence on the overall technology sector.
By examining the monthly, weekly, and daily technical outlook for the sector, as well as these five technology giants, it should give us some additional insight on the overall sector and identify new opportunities. Let's first look at the technology sector.
The S&P 500 Technology Sector had a great run from the August 2011 low to the September 2012 high as it gained over 41%. The major resistance at line c was overcome in early 2012 confirming the sector's strength.
This support was again tested in June 2012 as the overall market was forming a bottom with tech stocks being some of my favorites. The tech sector formed a doji at the mid-September high (see circle) and a low close doji was triggered the following week. At the post election lows, the key support was again tested but the sector was no longer a market leader.
The weekly relative performance completed its bottom formation in the summer of 2011 as it moved above its WMA. The RS line shows a clear pattern of higher highs up until the April 2012 high but just made a marginal new high in September 2012. The break of the uptrend on October 5 (see vertical line) was a sign of weakness, and it soon dropped below the early July lows confirming a new downtrend. The RS line continued to make new lows into the middle of April before it bounced back to its WMA and the downtrend, line e.
The RS line needed to rally over the past few weeks to complete a bottom formation, but instead it plunged to new lows. It now needs to move above the resistance from the past few months to signal that it is again a market leading sector.
Let's first look at Google, Inc. (GOOG) where the weekly chart shows a pattern of higher highs and higher lows going back to the summer of 2012 (lines a and b). On the weekly chart, it is evident that GOOG often turns lower when the weekly starc+ bands are reached or exceeded (see circles).
The week ending May 18, 2013, the close was $909.18, which was above the starc+ band, and over the next three weeks, GOOG dropped to a low of $847.22. The starc- bands have also provided good support as they were tested during the correction last fall.
GOOG moved above the 2012 high at $774.38 in early February, which was another good signal from the yearly analysis. The key resistance now is in the $950-$960 area, which corresponds to the upper boundary of the trading channel, line a, and the weekly starc+ band.
The monthly technical studies (not shown) are all positive and have confirmed the price action. There is monthly support from June at $847.22. The weekly relative performance closed last week just below its WMA but is still well above the support at line c. The RS line did confirm the new highs and the higher highs indicate that it has been outperforming the S&P 500.
The on-balance volume (OBV) also made a slight new high with prices, but volume increased significantly on the downside last week and the OBV is now testing support at line c. It would take the formation of a new downtrend for it to turn negative.
I have included the quarterly pivot levels on the daily chart of Google, Inc., and it came quite close to the 2nd quarter R2 resistance at $928 in May. The break last week violated the short-term uptrend, line b, which may set the stage for a test of the quarterly pivot at $854.08. This is just above the early June low of $845.92. There is longer-term trend line support at $834.
The daily relative performance failed to make new highs with prices and is now testing support at line d. From the March highs, the correction in the RS line lasted two months. The OBV is also below its WMA but did form higher highs, line e. A drop below the late June lows would signal a deeper correction.
Conclusion: The monthly and weekly trend for Google, Inc., are both positive. The monthly support is at $847.22 with the minor 50% Fibonacci retracement support at $845. These levels coincide nicely with the March high at $845.92, so this is an important level of support. The negative readings from the daily technical studies make a further correction or trading range likely. I have no new recommendation for now.
Amazon.com Inc. (AMZN) is a good barometer of Internet sales and consumer sentiment, as for many, it is their main destination for consumer purchases. The monthly chart (not shown) shows a clear pattern of higher highs and higher lows since the 2008 low at $34.68. The monthly studies are positive but the monthly relative performance has not yet confirmed the new highs.
The weekly chart of AMZN shows that the close two weeks ago was just over $3 below the weekly starc+ band at $310.68, and it traded in a narrow range last week. The high was also very close to the upper boundary of the trading range (line a), and the quarterly predicted resistance as indicated on the daily chart below (point 2)
This makes some consolidation or a pullback quite likely, especially with earnings to be released on July 25. The relative performance has just rallied up to resistance from last year's high, line c, as it has failed to make new highs with prices. The weekly OBV is lagging the price action even more as it has been in a very narrow range since early 2012. It is currently above its WMA and the support at line d.
There is initial weekly support at $286.14 and then at $277.16, which is the low, so far, for July. The weekly uptrend and lower weekly starc- band are now in the $254-256 area.
The daily chart shows that the recent high slightly exceeded the quarterly predicted resistance at $306.52, point 2. In the second quarter, AMZN held the predicted quarterly support at point 1, and then rallied over $50.
AMZN is drifting lower ahead of its earnings with the 20-day EMA at $294.96 and then further support at $285.29, line a. The daily uptrend, line b, is now at $272 with the quarterly pivot at $268.93.
The five-month downtrend in the relative performance, line c, was broken on June 6 just as AMZN surged above the resistance at $276. The RS line did confirm the new price highs, but has since dropped below its rising WMA.
The OBV also made a new high in July and is still holding well above its WMA. There is next good support for the OBV at line d, and then at the uptrend, line e.
Conclusion: While the monthly analysis is still positive, the weekly technical studies have not given very reliable signals over the past 18 months. Though this does not happen very often, when you see a pattern like this, it is better to rely on the daily technical studies in conjunction with the monthly and weekly support.
I would look for any pullback to find initial support in the $285-$277 area. This is the between the 38.2% retracement support from the May lows and the 50% support where good entry levels are often found. I would wait for new daily buy signals and then a stop could be used under the quarterly pivot.
Hewlett-Packard Co. (HPQ) has had a rough three years since it topped in early 2010 at $54.75. Their corporate problems have been well documented, and while many have a negative fundamental outlook for the company, the monthly charts suggest there was a selling climax in late 2012 when the stock dropped to a low of $11.35.
The monthly relative performance (not shown) broke its downtrend in January 2012 as it started to outperform the S&P 500. The following month, the OBV moved above its WMA and subsequently broke its downtrend. Both are still positive with the 20-month EMA at $23 and more important monthly support in the $19 area.
The weekly downtrend, line a, was broken four weeks after the low, and on January 12, it closed above the 20-week EMA. It has held above its EMA, which is now at $22.63. Early this year, HPQ tested the starc+ band for six weeks (see arrow) before it corrected sharply from $24.05 to $19.07. This correction held above the uptrend from the lows, line b, which has now risen to $22.40.
The weekly starc+ band is now at $28.11 with the 38.2% Fibonacci retracement resistance from the 2010 high at $27.85. The early 2012 high is at $30 with the 50% retracement resistance at $33.02.
The weekly relative performance moved through its downtrend and its WMA at the end of December. The RS appears to have completed its bottom, but it needs to move even higher to be sure. The weekly OBV moved above its WMA in early January and then overcame its downtrend, line d, in early March. It is in a clear uptrend and above its WMA but shows no impulsive upward action yet.
The daily chart of HPQ shows a well-defined uptrend that goes back to the November lows. It made marginal new highs at $26.71 in early July, but has since pulled back. The upper boundary of the trading channel (line a) and the predicted quarterly resistance are both in the $30 area.
The daily relative performance broke its downtrend last November and completed its bottom formation (see circle). It has been fairly choppy in 2013 but does show a pattern of higher highs that supports the price action. The RS line has good support at line c. The OBV also shows a narrow uptrend, line d,
The daily uptrend, line b, and the March highs are both in the $24-$24.15 area with the quarterly pivot at $23.25. If this level is broken, HPQ could drop back to the $20.80-$21 area.
Conclusion: Currently, the tightest stop place, in my opinion, would be under $21.99, which is the 61.8% retracement support of the rally from the April lows to the July 10 highs. Buying between the quarterly pivot and the March high would have about an 8% risk, which is too high. Therefore, I would recommend staying on the sidelines until we see how the correction develops. HPQ does not report earnings until August 21.
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eBay Inc. (EBAY) hit a high last week at $57.50 (line a) before reversing sharply to the downside and closing below the prior week's low at $53.37. The June break of the uptrend that went back to the 2011 low, line c, warned of weakness. The action last week now makes the support in the $49.20-$50.55 area, line b, much more important.
The 38.2% Fibonacci support from the August 2011 low is at $46.23 with the 50% support at $42.53. A decisive break of support at line b would project a drop to the $40-$41 area with the 61.8% retracement support at $38.84.
The weekly studies appear to have topped out. The break of the uptrend in the relative performance, line d, occurred in March and was a sign the EBAY was giving up its leadership over the S&P 500. The lower highs In the RS line supported this view as it is now clearly in a downtrend. The last bounce in the RS line took it just above the declining WMA.
The volume on the decline last week was heavy but still the OBV is holding up better than the RS analysis. However, the OBV has also turned lower after just moving above its WMA. A drop below the late June lows will be more negative.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.