The recent selloff of US tech stocks has endured for a number of reasons:
First, Facebook's (NASDAQ:FB) data breach seems to have awakened regulators to the idea that big tech is violating privacy rights in order to boost profits.
Third, US President Donald Trump’s continued attacks on Amazon (NASDAQ:AMZN)—initially for not paying enough taxes, and now for exploiting US Postal Service delivery fees.
Last year, big tech stocks led US equities higher in the strongest rally since 2013, and one in which the Dow Jones Industrial Average hit 70 records, beating the previous record setting year for this metric in 1995. This year these very same stocks are leading markets in a selloff.
A Bloomberg headline, above, characterizes the S&P 500 piercing of its 200 dma as the "last defense." There is however, one more defense, the February low.
While a close below that closely watched moving average would be a definite red flag—it would be the first time since after the Brexit vote, in June 2016, that this will have occurred—it's not the last defense. Only a penetration of the 2,532.69, February 9 low, would establish a downtrend.
Meanwhile, the benchmark index provided a downside breakout to the bearish pennant we discussed yesterday, whose implied target falls lower than the February low.
Should the objective be realized, it would post a second lower trough, establishing the required 2 peaks and troughs for a trend confirmation. In this case, that would be a downtrend. If this happens, trend following strategies, including algorithms, will increase bets on a further downside.
Right now, however, ordinary volume of under 2.5 billion does not demonstrate broad participation in the selloff. Contrarian traders may hold on to that.
Conservative traders would wait for a penetration – preferably on a closing basis – below the February low, establishing an official downtrend.
Moderate traders may wait for a return move to retest the pennant’s integrity, after the initial penetration satisfied a 2 percent filter, to avoid a bear trap.
Aggressive traders would short now.
Stop-Losses (Above provided parameters):
There are many trading strategies available for the same instrument in the same time. A trader must establish a plan, which would include his resources and temperament. This is crucial and determines success or failure.
Pair entries and exits should provide a minimum 1:3 risk-reward ratio. They should suit your time frame, with the understanding that the further the prices, the longer it will take to achieve them. Finally, understand that these guidelines are probability-based, which means by definition they include losses on individual trades, with the aim of profits on overall trades.
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