[Chart(s) of The Week] TECHnichal Difficulties

JC Parets
September 25, 2019

From the desk of Tom Bruni @BruniCharting

Technology is the largest sector of the market from an indexing perspective, but it's also pervasive because it finds its ways into other sectors/industries and often plays a big role.

With that as our backdrop, it's clear why Technology's relative performance is an important barometer for the health of the market...and it's been quite good since breaking out to new highs in 2016.

So can it continue, or are we due for some TECHnical difficulties in the weeks and months ahead?

Here's the chart we're watching. XLK/SPY is confirming a bearish momentum divergence and short-term top by breaking back below its April highs and the uptrend line from its January lows.

While not accelerating yet, this corrective action looks like a smaller version of the correction we saw play out in 2018. If that's the case, the risk is to the downside here unless prices make a quick reversal to the upside in the coming days/weeks. If not, weakness here would likely continue and act as a major headwind for US equities in general.

Click on chart to enlarge view.

So what could potentially drive Technology back to the upside?

Broadening upside participation.

Since late January the Equal-Weighted vs Cap-Weighted S&P 500 Technology ratio has been falling, signaling narrowing breadth within the Technology sector. With that said, this correction has brought prices right back to a long-term level of support/resistance near 2.22 and they're trying to stabilize with momentum staying out of oversold territory.

If prices are going to rally and participation is going to expand, this is a logical level for both to occur at. Tech has heavily relied on the Software subsector to drive it higher, however, with sellers showing up there we need some of the other subsectors like Cloud Computing, Internet, Cybersecurity, etc. to pick up the slack and begin leading again.

I've done a deep dive for Premium Members outlining this Technology bull/bear debate in more detail, but these two charts do a great job of summing up the current environment.

Technology is weakening and will continue to weaken as long as the subsectors other than Software continue to drag their feet.

Bulls, the ball is in your court.

Thanks for reading and let us know if you have any questions!

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Allstarcharts Team

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