The mayhem in the markets over the past three weeks has clearly caused a rotation out of the more offensive sectors towards defensive ones. The sectors with the clearest rotations are mentioned on the chart above.
One sector that I would have expected inside the lagging quadrant, or at least at a negative RRG-Heading, is technology (BETA well above 1).
And yet.... XLK, in the last three weeks, has rotated through weakening briefly into lagging, then through the center of the chart into the leading quadrant at a strong RRG-Heading. On the weekly RRG, the tech sector is ranked highest on the JdK RS-Ratio scale and is still gaining, while showing a minimal decline on the RS-Momentum axis.
This type of behaviour/rotation makes it an interesting sector to look at for potential buying candidates. To do that, we'll bring up the RRG holding the constituents of XLK.
With over 40 stocks in this index, the RRG is quite crowded. The tickers on the outside are usually good to see, but the rotations a bit more to the center are getting harder to pick up.
My routing, or trick, is to select the first row in the table below the chart, keep the CTRL/CMD key pressed and then using the arrow keys (up/dn) to toggle through the universe, highlighting the tails of each stock. This is a quick way to identify interesting tails that may require a bit more investigation.
The RRG below holds only the stocks with an interesting (positive) tail.
From these tails, the following stocks are showing relatively strong price charts as well - that is, they have not completely broken down.
PayPal is positioned inside the improving quadrant and at a positive RRG-Heading. On the price chart, a former resistance level has been tested this week as support and, so far, is holding up. Assuming that this level will hold in the weeks to come, this could be a broad trading range in the making, in which there is plenty of room for PYPL to rally.
From a price perspective, that $95 support level is important. On a relative basis, the RS-Line has started to curl up, making it an interesting name to watch.
Adobe managed to hold above its rising support line that has been in play since late 2016. That $280 level should hold in order for this trend to remain intact. The RS-Line is about to break higher after a long sideways (more-or-less) pattern. Such a break is expected to give the relative performance of ADBE vs. XLK a new boost.
Visa is hovering above its rising support line, which is still intact so far, as well as a horizontal support area between $150-155. Breaking below the rising support line will hurt the LT uptrend, but does not necessarily turn it around in a downtrend immediately.
The $150-155 range seems to offer decent support. For now, this is pushing relative strength higher, positioning the tail for V inside the improving quadrant and heading for leading.
Microsoft broke its rising support line but is now resting at horizontal support offered by a former resistance level. As long as this holds, the decline seems to be coming to a rest - at least for the time being.
The relative strength of MSFT vs. XLK is very strong. The RS-Line has broken to new highs, while both RRG-Lines are above 100 and rising, causing a strong RRG-Heading while inside the leading quadrant.
In contrast with the positive tails on the RRG and the individual charts above, there are also plenty of stocks with less appealing charts.
The RRG below shows the tails of the stocks that are showing weak and weakening relative trends vs. XLK.
The individual charts for these symbols are showing broken trends, broken support lines, etc., etc., including weak relative strength. Either RS is breaking below important support levels or, alternately, staying in and accelerating relative downtrends that were already in play.
Let there be no doubt. The charts of these individual stocks look awful across the board. But the relative strength of the group as a whole is surprisingly strong against the broad market (SPY).
This makes the tech sector a sector to keep an eye on, creating a potential shopping list for when things turn for the better. From a trading point of view, there are a few ways to approach these views and put them to work in positions.
I will write that up in an upcoming RRG blog and/or talk about it on Sector Spotlight (click the image below for the latest episode). The show airs every Tuesday from 10.30-11.00am ET, then becomes available on demand at our Youtube channel. Suggestions for topics, questions and suggestions are always welcome.
Julius de Kempenaer
Senior Technical Analyst, StockCharts.com
Creator, Relative Rotation Graphs
Founder, RRG Research
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