Back in June, I wrote an article about how the multiple technical indicators were pointing to the NYSE FANG+ index being at overbought levels. There were many harsh critics that my technical analysis was "Voodoo"; however, I was proven correct. Individual technical indicators are not always reliable, but when multiple indicators are used in conjunction with each other, accuracy is greatly improved. Since my call, the NYSE FANG+ index has fallen 17.95% and now, the same technical indicators I used before are pointing to this being a buying opportunity.
NYSE Fang+ Index Overview
For those that are not familiar with the NYSE FANG+ index, it consists of 10 equally weighted companies, which include the original FANG stocks: Facebook (FB), Amazon (AMZN), Netflix (NFLX), Google/Alphabet (GOOG) (GOOGL) along with the following companies:
Relative Strength Index (RSI)
The first technical indicator I looked at was the RSI and it shows that the FANG+ index is in oversold territory. The FANG+ index has not been this oversold before, and the previous two times the RSI was close to these levels was in July 2018 and the end of March 2018. The July occasion saw a bounce from those levels, but the downtrend resumed. The March occasion saw the index rise significantly.
Moving Average Convergence Divergence (MACD)
The second technical indicator I looked at was the MACD and it shows the FANG+ index is at an oversold level that was last seen in March. When the MACD was at this level in March, the FANG+ index had a strong bounce from that point.
Angled SMA (Simple Moving Average)
The final technical indicator I looked at is an unknown by name, but the principle behind it is simple. The Angled SMA indicator is from the ThinkorSwim platform and it looks at the slope of a moving average. It essentially measures the sharpness of a move and in this case, the sharpness of the recent move in the FANG+ Index has been making new lows. This means that the index is moving sharply to the downside more than it has in the past.
Based on these technical indicators, I believe a bounce is coming; however, I do not believe we will get as large a bounce that occurred in March. A number of the ten components of the FANG+ index have potential issues that could prevent them from returning to previous highs.
- Facebook has a number of issues, which include data privacy and weaker guidance, which was the cause of large decline after the last earnings report.
- Tesla has a number of issues that have been widely chronicled, so I will not go into them.
- Alibaba and Baidu have been taken down along with the Chinese market and will likely continue to have issues as long as tariffs are in the headlines.
I believe a bottom is in or near for the FANG+ index because the RSI and MACD indicators are at oversold levels and the recent move down has been sharper than in the past. If the bottom is in or close to being in, there are a number of choices to capture bullish sentiment in this group of stocks. For those that have a preference, you can simply buy the FANG+ stock(s), which are most appealing, based on your investment philosophy. To play bullish sentiment as a group, there is an ETF or ETN for that!
The First Trust DJ Internet Index ETF (FDN) is the ETF with the largest exposure to original FANG stocks. The allocation to the original FANG stocks is 33.54%. Another way to play a potential bullish move would be to use options on FDN to capture an upward move in the original FANG stocks. For those who have a high risk tolerance, there is a high risk/high reward way to play a potential bullish move and that comes in the form of a 3x leveraged ETN tied to the NYSE FANG+ Index. The ETN is the BMO REX MicroSector FANG+ Index 3X Leveraged ETN (FNGU). If you believe there is more downside from these levels, there is also the BMO REX MicroSector FANG+ Index 3X Inverse ETN (FNGD). The leveraged funds are for trading purposes only and anyone considering them should be careful if you choose to use them.
Disclosure: I am/we are long FB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.