Potential reversal in play

Today is September 20th, 2018 and we are seeing another day of record highs on the SPDR S&P 500 ETF Trust (SPY), where the most famous and commonly traded ETF has reached and even surpassed the $292 mark.

The Technology Select Sector SPDR Fund (XLK) is one of the most strongly correlated ETFs to the SPDR S&P 500 ETF Trust (SPY), due to the fact that the Tech sector has been the leading growth generator in the US Equity markets for more than 20 years. The large cap tech corporate giants like Apple, Microsoft, Visa, Intel, Cisco, Adobe, Nvidia and many others have continued to outperform the broader market for years now, generating hundreds and thousands of percentage point returns for their investors.
This has indeed turned the XLK into one of the most important and closely watched ETFs out there, as it consists of some of the most famous, successful and prominent publicly traded corporations in the world. The strong 89% correlation with the SPY is pointing to the fact that the Technology Select Sector SPDR Fund (XLK) could actually be the sector leading the upcoming decline and investors need to be aware what does that mean for some of the major household Tech names in the market.

The technical picture on the price chart confirms the loss of upward momentum, and paints a similar negative narrative as the one we have already identified for the SPY, XLY, HD, AMZN, AAPL, thus further strengthening the conviction of our trade analysis. The XLK has already appreciated with more than 18% so far this year, but it has been struggling to break the $75-76 resistance zone for more than 3 weeks now. As a result, the RSI has formed a clear divergence similar to the one we are seeing in all of the above-mentioned stocks and ETFs. There is an upward sloping diagonal trendline support currently lying at the $74 level, and a 50-day Moving Average (MA) coming at the $73.40 mark. Investors should be monitoring the price action very closely, as breaks of these two strong supports would be the final confirmation of the bearish reversal. We will start selling the XLK around the current $74.09 price and would further add to our SELL positions on any move up to the $75-76 resistance zone. We will place our initial take profit at the $72 horizontal support, with our extended targets lying at the $68 and $65 levels respectively.

The expected correction for the Technology Select Sector SPDR Fund (XLK) in the coming weeks would present a tremendous buying opportunity for long-term investors, as some of the major household names in the market would be trading at a substantial discount from current levels. Modern day intelligent investors have learnt to explore the irrational nature of the current market environment; thus, we expect a quick and powerful rebound for the Tech sector once the correction takes place. It is always a great idea to buy a fundamentally strong company, with a leading market position and outstanding financials like Apple, Google, Microsoft etc. after its stock has suffered a downside pressure from heavy ETF selling. As long as there are no negative company-related news, the lower the ETF pressure sends these stocks the more attractive they become from a valuation perspective.


The 1st stock-pick from the XLK this week is Apple Inc. and our reasoning for wanting to SELL probably the most fundamentally solid stock in the US equity market is purely technical and based on the company’s major percentage participation in both the SPY and XLK ETFs. The stock currently represents 4.30% of the SPY and 19.12% of the XLK. The two ETFs are expected to experience at least a 10% decline in the next couple of weeks following the divergences that we see on the chart, the clear loss of upward momentum, the sector rotation of institutional capital, as well as the strong positive correlation of 89% between these two ETFs.

The 2nd stock for this week’s analysis that is expected to move in sync with the rest of the stocks in our investment rubric is Microsoft Corporation (MSFT). The company currently holds an almost identical presence in the SPDR S&P 500 ETF Trust (SPY) and Technology Select Sector SPDR Fund (XLK) as our other technology stock-pick for the week Apple Inc.
Microsoft currently represents 4.30% from the SPY and 19.11% from the XLK, thus we expect a very similar level of depreciation of the stock to the one that we anticipate for Apple.
As we previously discussed, the 89% positive correlation between the SPY and XLK will be the main driving force behind the next move lower, for some of the major stocks that are part of these two ETFs.

*Please visit the full analysis here and find out more details regarding this trading set-up!


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