Take a Look at Google GOOG DELL and Technology XLK

Sep 9, 2008: 10:49 AM CST

What we may have missed recently is the weakness in technology related companies over the last week which was particularly punishing for most tech companies that started roughly at the same time DELL missed earnings and gapped lower.  Let’s look at the XLK Technology SPDR and Google for some insights.

XLK Technology Sector SPDR Daily:

The action in XLK almost mirrors that of the broader markets with the exception of outperformance in August and underperformance in September.  For the relative strength ratio, divide the XLK by the S&P 500, or type in XLK:$SPX in StockCharts.com.

We see a negative momentum divergence going into the May/June price highs that preceded the reversal which led to a positive momentum divergence and symmetrical triangle consolidation pattern throughout July with a breakout and strong momentum move into August.  That’s where the fun stops, however.

After failing a test of the 200 day moving average (it didn’t actually make it to that level), price fell back to moving average support, consolidated, and then burst downwards in a price expansion, making new lows not seen since March.

Notice this is a non-confirmation because the broader indexes (S&P 500) failed to make new price lows beneath their July 15th ‘bottom’.  It shows relative weakness in technology.  Possible support for the index comes in around $21.00, which is the March price lows – let’s see if that holds.

Google (GOOG) Daily:

Google (GOOG) is showing a lackluster stock performance here after a large-scale gap in late April – the gap is now officially filled (and then some).

Price formed a ’rounded reversal’ top and supported twice on the 50 day EMA prior to breaking down below this level, finding resistance there in July, and then rolling (gapping) sharply to the downside in July.  Price formed a mini-descending triangle consolidation pattern which resolved to the upside, found resistance at the same falling 50 day EMA before making the momentum move down into today’s price.

Just like the XLK, Google has potential support from the March lows around $400 to $410 per share.

Let’s look at the major culprit behind the recent action:  Dell Inc.

DELL Daily:

I used this chart to highlight two things.

First, notice the “Three Push” Pattern that preceded the price plunge to the downside.  This is tantamount to a negative momentum divergence as price scrapes its way to new highs.  After the third weak peak, a reversal is expected (though we never know how far it will go and certainly never could have predicted the magnitude of the downside action thanks to the earnings miss).

Astute traders may find this pattern similar to the “Elliott Wave” Theory pattern of a five-wave impulse move that terminates with the 5th wave.

Second, I wanted to show the relentless selling and punishment investors have given this stock following its earnings announcement.  Often, we see at least a partial retracement into an overnight gap, but this was clearly not the case in Dell.  This move was extremely hard for anyone to trade long or short because you ask “when will it reverse?” to get long and ask “is this a good entry/will it reverse?” as well to get short. Run-away momentum moves can be difficult for both sides of the market, especially for the side losing money on the position.

Stay focused on these stocks and others in the technology sector for clues about continued market strength or weakness.

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