Tech stocks are under pressure, and it’s finally showing in the major averages.
This weakness has actually been brewing under the hood for some time.
Technology sector internals have been deteriorating for the better part of the summer.
The new high/low ratio is a solid and simple breadth measure, and it peaked on July 3rd.
So, was that it— just a little dip n’ rip, like the one we experienced coming into the month?
Or are tougher times ahead for tech?
Luckily, we have some clean and clear levels to use as a roadmap. Here’s the Equal-Weight Technology Fund $RSPT:
Notice how it has formed a potential short-term top right at its Q4 and Q1 highs.
Price has been testing the trigger level of this top constantly during the month of August, but for now, bulls are holding the line.
If that changes, and RSPT breaks below 40, the odds start to favor a deeper, more prolonged correction. I’ll be looking at the VWAP from the March lows around 37 as support, which represents another 8% of downside.
Keep in mind that AVWAP is dynamic support and will continue to rise until it meets price.
And while tech is a diverse space, when I think about the likelihood of this being a top, I immediately think about two subsectors and charts.
Tech is going wherever semis and software go.
Each industry group makes up approximately 35% of the large-cap technology index.
And these stocks aren’t just a big deal for this one sector; they drive the entire market. Not to mention, there’s a ton of software in other sectors so that number could be higher, but that’s another conversation.
Semis plus software make up almost a third of the S&P 500 and close to half of the Nasdaq 100.
Semiconductors are the most important companies in the world and are critical to the health of the overall market.
Here’s the VanEck Semiconductor ETF $SMH, digging in and holding support with a similar setup as RSPT.
The line in the sand is 280.
Meanwhile, software companies are the best businesses in the world, home to many of the largest stocks and top-performers in the market.
Here’s the iShares Software ETF $IGV, which just completed a similar tactical top as the two shown above.
It is now below the Q4 highs, resulting in a failed breakout of the longer-term consolidation pattern.
There we have it. One NO vote, and one YES vote for technology.
If software follows through to the downside in the coming days and confirms this top, I fully expect that semiconductors and the broader tech index will follow.
If this is the case, I’ll be prepared for a further corrective wave from tech and the broader growth trade.
On the other hand, this could end up being a shakeout, as software can scoop higher and fail this top in the coming days.
108 is the level for that.
With the much-anticipated Powell speech tomorrow, we could surely see some action. If this is what plays out, look for semis and tech to ramp higher too, and reassert that old leadership.
I’ll be using these charts to determine new trading positions and exposure in the coming days and weeks. If we hold on and head higher from here, we’ll identify the best coils in the market leaders and ride them higher with calls.
