During this most recent dramatic sell off in the US equity markets, many heretofore invulnerable stocks were finally subject to some deserved profit taking. The cluster of dominant market stocks collectively referred to as the “FAANG” stocks, Facebook, Apple, Amazon, Netflix and Google, all sold off, some in the order of 20%, signifying to many, the onset of a bear market. This characterization is somewhat useless as you can imagine if someone waited for 20% of their house to be engulfed in flames before declaring that the house was on fire.
Still, 20% is 20% and would be especially painful if one’s entry was recent. Every one of these issues however, have advanced from and continue to be in strong long term uptrends. In fact, it is their unabated ascent which has been somewhat unusual. We can discuss reasons for this, but a certainly a large part of it is the concentration of buying power in our present market era.
At times when a correction finally occurs in habitually strong issues, or markets in general, the natural response among participants is to infer panic and fear. This is hardly new and is the basis for a technical view of markets as an adjunct to strictly actuarial ones. One of the most fundamental tenets of technical analysis is the concept of trend; the acceptance that stocks do move in sustainable trends over time and variations from those trends are indicative of a change in the supply/demand balance.
As a trader or investor, an equally important consideration are the areas of support and resistance traced out by the issue over time. As an illustrative example, we consider the current chart of Google below:
The weekly chart of Google shows the decline in price during the recent period of the market’s correction. When the price declined to 1000 from the recently made high print of 1258, it constituted a 20% correction from the high, which would imply a bear market. However, as the chart indicates, 1000 is likely a major support point since there is a history of this being the case in the recent past. It makes more sense to consider being a buyer of Google near this support point than to try to sell through it. This is an observation made in isolation and of course we would have to consider other momentum indicators as well in making a trade, but the point is to illustrate that a picture of support and resistance is crucial to assessing entry and therefore risk.
Google may yet break down, but at this time, we’d need a lot more technical evidence to arrive at that conclusion.