Thursday, November 15, 2007

Technical Thursdays: Tech vs. Financials – Two Horses of Very Different Colors

There is a temptation by some to view the recent correction in Tech issues as signaling something more ominous lies ahead for the group. From a moving averages principle, don’t buy that argument.

There is also a temptation by some to view the recent bounce by the Financials as an indication of a bottom and a reason to invest (versus trade) in the group. Again, from a moving averages principle, don’t buy that argument.

As the two charts above* show rather clearly, one (Tech) is merely correcting its bullish mega trend while the other (Financials) has enjoyed its’ dead cat bounce within its’ bearish mega trend.

In the case of the large cap Tech and Telecom (XLK), the moving averages principle says stay in the issue as price is above the moving averages, the 50 day is above the 200 day, and both moving averages are pointing up. As the chart shows, the recent correction has pulled price back to its 200 day, a typical corrective action in a bull mega trend. However, should XLK trade below its 200 day, one should add to the position as the 50 and 200 day must cross and turn down to send a reversal signal of the bull mega trend. That appears to be unlikely anytime soon.

Re the short term indicators, momentum and MACD, they are in deep oversold territory and will require a few days to a week or two to repair the recent damage done. If all unfolds as noted, it then should be off to the races as XLK will be in good technical condition to make a strong year end run.

Now, compare this racehorse to the nag known as Financials.

On a longer-term basis, the opposite conditions exist for the Financials. Applying the moving averages principle, price is below moving averages, 50 has crossed below the 200 day and both are pointing downward. The exact opposite of Tech and Telecom and of its own prior multi year bullish mega trend.

On a shorter-term basis, XLF, like XLK, is in deep oversold territory, which was good for bottom fishing bounce traders (that trade seems to have come and gone) but bad in the sense that it will take a few days/weeks to repair the damage.

Investment Strategy Implications

Tech (specifically big Tech plus Telecom) and Financials are two horses of very different colors. One is in race to new highs benefiting from the weak dollar and the global growth story while the other is, at best, fishing for a bottom hampered by credit woes and large losses still to be reported.

Which horse will you place your bet on? Seabiscuit or Swampnag?

*click images to enlarge.
Note: all charts sourced from

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