The stock market’s favorite sector may be headed for trouble.
Technology stocks have been leading the stock market higher since everything bottomed in early April. While the S&P 500 is up about 29% since then, the technology sector is 47% higher.
That is a remarkable level of outperformance… But, things are starting to shift.
The S&P 500 rallied to another all-time high on Wednesday. But, the technology sector – as represented by the Technology Select Sector Fund (XLK) – closed 2% below its high from earlier this month.
Rather than leading the market during August, the tech sector has lagged. And, that is creating a rather ominous looking chart pattern as we head into September – a typically poor month of the year for stocks.
Take a look at this chart of XLK…
It looks to me like XLK is creating a “Head & Shoulders” topping pattern. This is a bearish pattern that signals the potential reversal of a bullish trend to a bearish one. It is formed when a stock that has been making a series of higher highs and higher lows makes a lower high followed by a lower low.
The current bounce in XLK has not yet made a higher high. If it rolls over from here, we’ll have a lower high in place. From there, a close below the previous low at $259 would establish a lower low – which would confirm the start of a downtrend.
Since the height of the pattern – as measured from the most recent low to the previous high – is about $15, the targeted move is $15 below the most recent low. In other words, if XLK closes below $259, it could drop quickly towards $244 – thereby wiping out everything the technology sector has gained over the past 10 weeks.
It doesn’t have to happen this way, of course. If XLK can rally above $270 and make a new high – before it makes a lower low – then this pattern is negated, and the uptrend remains intact.
We are heading into September, though. And, given the seasonal bearishness that hits stocks this time of year, it seems to me the technology sector is setting up to lead the market lower.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
Free Trading Resources
Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out.