Value vs. Tech (Part 2)

By Facesincabs

“The goal of a successful trader is to make the best trades.  Money is secondary.” – Alexander Elder

When beginning my introductory post to ZenTrader yesterday, I felt it important to post the value side commentary first.  For some background, I am frequently a bearish trader (e.g., shorting the markets) and I currently see some short-term downside potential in the tech side of the markets.  My view of technology is certainly counter to general market sentiment has been since last Tuesday.  However, if the markets did begin to pull back, at this time I would expect the tech sector to lead that price adjustment.  Any tech pull back will certainly be contingent upon its former leadership breaking key supports (like AAPL breaking the long held $500 level, which I will discuss below).  First though, let's review a chart I posted and began with Monday here on ZenTrader.

Tech Divergence (for months tech has lagged value)

As I pointed out on Monday, the value side of the market has a lot going for it.  This includes low volatility, a long trending climb by the A-D line, low volume with few sell offs, a recent bond yield bounce (inflating equities), and leadership trending up.  HOWEVER, the tech sector charts do not share many of these features, as we will see below.

Review of Tech Charts

I am providing several charts.  I would begin by commenting that the current divergence by tech does show up in many market internals (like its A-D Line).  You may want to go back to review Monday's post and compare today's tech charts with the value charts I shared early Monday.  Let's begin with a bigger picture of technology.

Tech Big Picture (never recovered from its 2000 crash .. and now a 2nd back test at fib)

Tech Weekly (H&S pattern possibly forming .. still a bit early but worth watching)

Tech Daily (prices and patterns that I am watching daily .. note possible ST megaphone formation)

Tech A-D Line (battered and choppy .. not trending like NYSE A-D Line)

Volatility ($VXN is crushed much like the $VIX .. however tech continues to see relative weakness)

After seeing these charts, it is not difficult to realize how tech and value are behaving differently in the current market rally.  One question I am asking myself is, “Has Technology put in a short-term (and very early) top in the 1st week of 2013?”  I do not know, but my technical suggestion to all would be to watch last week's gap up (see daily chart above) and the 2700 price level of the $NDX.

Furthermore, it is difficult to know if the value side of the market can remain strong enough to literally pull all sectors up (including tech).  If current market leaders like cyclicals and small cap's begin to pull back (see charts from Monday), then tech could more easily lead an overall market pull back and the value side of the market could simply go sideways or even pulls back a little.  If cyclicals and small cap's continue their surge though, the tech sector would have a difficult time initiating a broader market pull back.  Overall, from my experience, watching the inter-market relationships is one key to having a trading edge, so that is what I am broadly acknowledging here in these two blog posts.

AAPL (watch this former tech leader for clues)

AAPL no longer influences the entire market, however, I continue to find it to be an important windsock when directional winds shift on my tech charts.  After forming a parabolic pattern earlier this year, it fell 29%.  It is in a bear market (by itself).  Last week, after maxing out near 555 on last Wednesday's exuberant relief rally, a new pull back has quickly formed (once again) for Apple.  To my trading eye, AAPL's down trend remains its most important technical feature.  Here are two charts:

Apple Daily (quickly back down from a 3rd island top .. watching $500 level closely)

Apple Weekly (parabolic move, succeeding bubble, and the ensuing 29% correction)

Technically, I would note on the daily chart the similarity of each of the three tops, beginning in September 2012.  They each include a black topping candle, an island top pattern, and a gap down within the next two days.  AAPL has been back on my trading radar since last Thursday.  For example, Monday I shorted AAPL (bought Feb 520 puts) just under $529.  My stop is near $531-532 (e.g., former support becomes resistance).

You can find me trading on Twitter most days (@facesincabs), where I socialize with other traders, share entries and exits, and comment real time about the markets.  Good luck with your own trading (luck = preparation + opportunity + a little risk).