On November 21, I warned that the technical setup in the SPDR Technology ETF (XLK) could result in the exchange-traded fund (ETF) breaking lower.
Finally on December 1, XLK put in a top.
Since then, the ETF has sold off by as much as 6%.
My original analysis made use of two important moving averages (MA)… the 100- and 200-period MAs, which typically form strong resistance and support zones.
And that’s what happened on December 1…
First, let’s take a look at the price chart I showed at the time…
The market was just entering the resistance zone between the two moving averages (blue and green lines).
XLK couldn’t break through this zone and sold off instead.
Now, the next step is to identify where the market might find support.
It stands to reason that if we can use MAs to forecast resistance in the market, then we can also use them to identify potential future support.
So, let’s look at a current price chart of XLK so I can show you what I mean…
The price action has visibly struggled to break past the 100- and 200-period MA (the resistance zone I mentioned earlier).
This isn’t great news for the tech sector.
But there’s another MA that could still serve as strong technical support – the 50-period MA (red line).
You can think of the 50-period MA as the “last line of defense” in XLK. Right now, it’s at $126.58.
Breaking below this technical indicator opens the door to further weakness. The next downside target would be the October 13 lows of $113.
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Moving averages are great tools to help identify long, intermediate, and short-term trends.
The 100- and 200-period averages identify the long-term trend in XLK as being to the downside.
But the 50-period MA is excellent at identifying the intermediate trend.
As you can see from the price chart, the market is currently trading above that 50-period average.
So long as XLK can stay above it, the bulls don’t need to panic.
But, if we break hard below this MA, then it’ll be a strong signal that the bears are in control.
The bottom line is that this market is still at a crossroads.
It’s easy for anyone to say that a market could go higher or lower, but that kind of information isn’t useful.
This why technical analysis is invaluable.
Looking at the technicals of a market allows a trader to come up with clear parameters for what kind of action to take based on the market’s behavior.
In the case of XLK, the parameters are straightforward:
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The market is more likely to strengthen if it can eventually clear the 100- and 200-period resistance zone.
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The market is more likely to sell off if it breaks below the 50-period MA.
Right now, we’re still in no-man’s land. And that’s the most dangerous area to be taking a trade.
I’ll be keeping a close eye on XLK to see which set of parameters the market is going to fulfill, and I’ll update you when that happens.
Happy trading.
Imre Gams
Analyst, Market Minute
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