Chart of the week: time to take profits on these trades?

10th January 2022 13:39

by John Burford from interactive investor

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With central bank policymakers caught between a rock and a hard place, our technical analyst looks at the big tech names like Apple and Netflix, and at stocks more broadly.

Are the FAANGs losing their teeth?

It is no secret that the major US indexes, especially the S&P and Nasdaq, have been led by extreme investor focus on the big-name tech titans with mega-caps. The most prominent of them is the group known as FAANGs (or FANG+). They comprise Facebook/Meta (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX)Alphabet (NASDAQ:GOOGL)/Google and Microsoft (NASDAQ:MSFT) (the '+'). And all of them have advanced sharply off the March 2020 corona crash lows.

That is, until now.

In recent days, the shares have fallen off their all-time highs and many have broken below key support levels. Late last year, I covered the advancing Apple and suggested it was at, or very near, a major high and on the brink of a significant correction (latest trade at $172). And now, the first trading days of the new year have provided even more clues that the others in the FAANG gang are joining Apple in rolling over.

And since the FAANG gang led on the way up, it will surely lead on the way down.

Past performance is not a guide to future performance.

This FAANG chart goes back to the March corona-crash lows and, collectively, it has surged from 2,480 to the recent high at 8,050 – an astonishing gain of 265% in less than two years. No wonder these became known as the 'Never Sell' growth stocks. But a warning; no tree grows to the sky and eventually it topples over!

Of course, investors were enthused by the earnings potential caused by the pandemic lockdowns, where working on laptops from home remotely surged. And Netflix was boosted by those furloughed in house arrest who watched films on the couch (and/or opened Robinhood share trading accounts to become instant 'experts' at day trading).

But interestingly, while Zoom Video Communications (NASDAQ:ZM) – the universal means of keeping in touch with work colleagues – were initially boosted in the first lockdown, the shares actually topped in October 2020, just around the time many 'value' shares started turning up off major lows (including banks). It is now trading 70% off its all-time high and making new lows.

Back to the chart, and the market is on the verge of breaking hard below the major uptrend support line. Note the Prior Pivot Point (PPP) that usually anchors a lengthy major line separating support and resistance. And note the large momentum divergence at the 4 November high, a sign of flagging buying power into the high.

As for Netflix, the shares have now broken below key support and are trading 24% off their 15 November record high. Ouch!

Past performance is not a guide to future performance.

Netflix has now broken below my major lower wedge line but is into chart support where we could see a bounce. That may be an ideal opportunity to adjust portfolios. But if the support gives way over the next few days, it should be in a hard down phase.

One data point caught my eye on Thursday: Bloomberg reported that of the 100 shares in the tech-heavy Nasdaq index, almost 40% of them have plunged by at least 50% from their one-year highs. That is not a bullish sign – and it appears to be leading the general markets lower.

The last index holdout – the Dow Jones – made its high last Wednesday just after release of the December Federal Reserve minutes from where it reacted badly.

In fact, the Fed is caught between a rock and a hard place. Does it continue with stimulus to prevent a stock crash, or does it tighten to fight rapidly rising consumer inflation?

One of the keys in this jigsaw puzzle is the energy markets. If crude oil and natural gas maintain their uptrends (as seems likely), my money is on rising price inflation and sagging stocks this year.

Again, I believe it prudent to take at least some profits, especially in the well-known tech names.

John Burford is a freelance contributor and not a direct employee of interactive investor.

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