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FANG Stocks Should Rally if Bonds Do

If bonds rally, then FANG stocks should enjoy an oversold rally.

The Market

After Thursday’s rout in the FANG stocks – Meta (META), Amazon (AMZN), Netflix (NFLX), Alphabet (GOOGL) – we looked at the charts, but I turned them upside down since so many people have an easier time seeing breakouts to the upside rather than the downside. The discussion centered around how bad these charts looked but also how stretched they were in the short term.

Most of them did try to rally late in the day on Friday. But let’s circle back to late September when we looked at the Sentiment Cycle. At the time I suggested many stocks were likely near Aversion but the FANG names were likely heading into Panic.

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If you look at the chart of Alphabet, you can see that last week looked a bit like Panic. If I am incorrect and Panic was late September and last week was Discouragement, it wouldn’t matter that much in the big picture because even after Discouragement there is an awful lot of up and down to come. My guess is the FANG names are still on the left side of the chart, not the right.

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For months these technology names were so linked, almost tick to tick with the bonds. In some fashion they still are, now it’s a bit less tick for tick. But if bonds do rally then these stocks should enjoy an oversold rally. And why should bonds rally? Because the Daily Sentiment Index is at 8. It would be highly unusual for bonds to keep sliding much more with a DSI that low.

Aside from that, the indicators remain mixed. Short term, we’re not yet terribly oversold. Intermediate term we’re not yet overbought. That usually means we get a chop-fest or more volatility. Last week, the S&P 500 was up and down as it is working off the short term overbought condition. I don’t expect that to change much.

I am still eyeing sometime near Thanksgiving as when we might see the market back to an intermediate term overbought condition. Notice the 30-day moving average of the advance/decline line has finally lifted itself up and over the zero line. My guess is it sees another dip and one more push upward in November.

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We can also look at the Volume Indicator. It is now 52%. Recall it got oversold in late September when it got to 41% and turned neutral last week when it moved to 48%. I would expect this to dip and rally one more time before the end of the month. The mid to upper 50s is overbought so it’s got a toe there now.

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Just getting overbought is not a reason to turn cautious. We would need the McClellan Summation Index to turn down and the number of stocks making new highs to contract and new lows to expand as well.

The good news is that there are some charts that are working. The U.S. dollar still looks to me as if it wants to go lower rather than higher. However, unless or until it breaks that lower line with some oomph, it is only my own speculation that says it is going lower. A lower dollar helps stocks.

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A lower dollar should also help iShares MSCI Emerging Markets (EEM), a chart I warmed up to late last week. Here is a one-year chart of it. The resistance at $38-ish is solid but getting up there would be a great start.

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For now, I would say I can still see a volatile week ahead, but I’ll wait for the indicators to turn south before thinking there’s more to it.

New Ideas

Based on the low DSI, I’m a buyer on iShares 20-year Treasury Bond (TLT), especially if there is any weakness early in the week.

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Today’s Indicator

The Hi-Lo Indicator is at 0.33. I expect it to push up toward that 0.39 area and then we’ll see.

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Q&A/Reader’s Feedback

Helene welcomes your questions about Top Stocks and her charting strategy and techniques. Please send an email directly to Helene with your questions. However, please remember that TheStreet.com Top Stocks is not intended to provide personalized investment advice. Email Helene here.

Braskem (BAK) - Get Free Report is trying to form a bottom. It ought to make its way up toward $15 where there is a decent amount of resistance.

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I still don’t see much of a reason to buy Generac Holdings (GNRC) - Get Free Report. It is oversold and it should enjoy an oversold rally, but it’s hard to imagine that it won’t ultimately be a candidate for tax loss selling as we get closer to December.

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And iShares Silver Trust (SLV), an ETF to be long silver, had enjoyed a nice rally — to resistance. I do think if the dollar breaks that uptrend line SLV can get itself to that $20-$20.50 area, but as you can see, there is a decent amount of resistance in that area.

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