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Distribution In The Technology Sector

Summary

Volume-price analysis of volatile trading session on July 28th of 2017.

Beginning of a Distribution Phase in the technology market sector.

Analysis of the Nasdaq 100 index.

On July 27th of 2017, we had volatile trading session and it is worth special attention as it may help understand current sentiment on the market.

On that day, the daily volume on the S&P 500 index hit 2.583 million shares - the strongest daily volume since 06/16/2017. Nasdaq 100 and DJI indexes also had strong volume surge on that day.

The same as on June 9th of 2017, the July 27's volatility was mainly caused by the technology stocks like AMD, TWR, FB and etc. On July 27th of 2017, the Nasdaq 100 index

  • was traded 0.7% up shortly after the market open;
  • then, it index crashed 2.3% down;
  • then, it bounced up and recovered most of the losses by closing the day 0.4% in red only.
  • All it went on high volume - smaller by size, but very similar scenario to the one we had on June 9th of 2017.
  • All it went on high volume - smaller by size, but very similar scenario to the one we had on June 9th of 2017.

Volume-price analysis would interpret the July 27's trading in following way:

  • High volume tells us that it was not an action of retail traders. Some group of large institutional investors (we call it first group) decided to dump (distribute) their technology shares.
  • As they started to sell, they created strong supply which pushed the indexes strongly down.
  • As market indexes declined strongly, another group of large institutional investors (we call it second group) entered the market and started to buy from the first group.
  • As the first group saw that their selling pressure may cause a strong decline they yielded and they let the second group of investor to pushed the price up.
  • The first group of bearish investors yielded to the second group of bullish investors because they want to distribute (sell) much more than the market can absorb without causing a strong decline. Since they want to sell at the higher possible price they yielded and they let the second group to push the price up. They did it on June 9th and they did it again on July 27th.

We do not know the motivation behind the first group of bearish traders.  However, we know the following

  • A group of large institutional investors started the distribution of the stocks from the technology market sector.
  • Two times they flooded the market with a strong supply and they did not finish selling all they wanted to sell.
  • Most likely they will be back as the Nasdaq 100 stocks recovers from the decline on July 27th of 2017.
  • When they are back they may push the Nasdaq 100 index into a correction which could be deeper than the previous ones - the Nasdaq 100 may drop below $5.500.
  • When they are back, they may not necessary come in strong volume. This time it could be on lower volume and smaller declines.
  • This distribution is isolated to the technology market sector only. On June 9th it affected lightly the S&P 500 and DJI, and on July 27th, it affected S&P 500 index and DJI index was not affected at all. Therefore, if we run into a strong correction on the Nasdaq 100 index, it should not affect general market trend - we will remain in the Bull market.
  • The long-term Bulls are strong and they use any weakness to start buying at low. If the Nasdaq 100 dives into a correction, at some point, it will be on high volume as long-term Bulls will be entering the market.

Chart : S&P 500 index volume chart - 1 bar = 1 day

Chart courtesy of https://www.marketvolume.com/stocks/analysis.asp

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.