Morning Comment: Update on the FAANG charts.
Yesterday’s decline was meaningless. Today’s action should be equally meaningless.
The decline in the stock market we saw yesterday was pretty meaningless….as it came on very low volume of only 2.05bn shares. To be honest, unless we get some incredibly surprising last-second news, it’s going to be hard to decipher anything from today’s action either…as the last day of the year rarely sees much pick-up in volume……With this in mind, we thought we’d talk about the most important stocks from 2017 & 2018 (the FAANGs….FB, AAPL, AMZN, NFLX and GOOGL). No, they were not the most important stocks of 2019, but all five of them sit at key technical junctures as we move from 2019 and into 2020…and they are still very important stocks! Therefore, we thought this would be a good day to update at these key names today.
The FAANGs continued to be leaders early in 2019, but they lost that status in the spring.
Before we update those specific charts, we’ll quickly review the action in the FAANGs as a group over this past year. It’s weird, if we went by memory, we’d say that the FAANGs lost their position as THE leadership stocks for the broad market very early in the year. However, that’s not accurate. Over the first four months of 2019, they kept their leadership status…as they rallied 29% as a group into the end of April. This compares to “only” a 17% rally in the S&P 500 index, so these names definitely helped lead the market higher during the first leg of this year’s rally. However, that ended very quickly in May…when political issues hit the group much harder than it did for the broad market. (The FAANGs fell 15% vs. less than 7% for the SPX.)
However, those FAANG stocks have regained A LOT of momentum over the past several months.
This is when the second misconception for the FAANGs began. After those early June lows were reached (the lows for the year for both the FAANGS and the S&P), it sure “felt” like the FAANGs continued to underperform. However, even though the FAANGs were only able to claw their way back to their April highs…while the S&P was able to exceed its April highs by almost 10% (as of last night’s close)…they have both rallied 18% over the past seven months! In other words, even though the FAANGs lost all of their “outperformance” vs. the SPX in May, they have performed “in-line” with the broad market since June….AND on a YTD basis. (That’s right, both the S&P and an equal weighted index of the FAANGs are up about 29% YTD).
They’re all overbought near-term, but their action over the next 4-6 week should be very important.
What we’re trying to say is that even though the semis have taken over for the title as THE most important leadership part of the tech sector (and thus the broad market in general), these FAANG names will still be very, very important for the market in 2020. They are all getting overbought on a near-term basis, so anything could happen over the first few days of the year. However, they’re all also at important junctures in terms of their charts on an intermediate-term basis, so how they act over the first 4-6 weeks of the year should be critical…….So let’s take a look at all of them individually. Here we go……
Facebook (FB)……..The most recent pop in FB has taken it above a “symmetrical triangle” pattern that goes all the way back to the middle of the summer of 2018. (That’s when the stock fell 19% in one day…after a horrible earnings report in July of that summer.) The stock has also broken slightly above its 2019 highs (from this past July), so that’s a positive development as well.
That said, we still have the 2018 all-time high of $217.50…which is not far from where it closed last night. Therefore, that level could/should provide some resistance if the stock rallies further from current levels. However, FB is also coming off of an overbought condition from late last week, so that could cause some near-term issues for the stock as well. As you will see below, this overbought reading for FB is not as extreme as it is for some of the other stocks, but it’s still at a level on its weekly RSI chart that was followed by significant declines over the past two years. Therefore, it could still something that could/should creates some headwinds for the stock in early 2020. (Of course, in 2017, FB remained very overbought for most of the year, so nothing is definite.)
You might be asking yourself how in the world we could be saying that the stock needs more upside follow-through after it has already rallied 26% off of its early June lows. It’s just that most of that rally took place by mid-July…and has been range-bound over the past five months. So if it’s going to see yet another significant leg in its powerful rally off the Christmas 2018 lows during the first half of 2020, it’s going to have to break to a new record high (either now…or after a short-term breather). This is especially true given that they bi-partisan political headwinds they’ve been fighting are not going to go away during this election-year season.
That said, if it can break above that old high, it should be VERY bullish for the stock…because it is not anywhere near as “over-owned” as it was in the summer of 2018 (the last time it tested $220). Thus a break above that level will give it A LOT of upside room to run if (repeat, IF) it can break above $220 in an significant way…..As always, we don’t want to get ahead of ourselves. A substantial decline from current levels will negate everything…but the next few weeks should indeed be critical for FB.
Amazon (AMZN)……After making a “double-top” in July just above the $2,000 level, AMZN rolled over and has badly underperformed the rest of the market over the past six months. HOWEVER, last week it broke slightly above the sideways range it had been in for five months…so that was definitely a positive development. That said, the “break” was only a very slight one…and it has already fallen back to the top-end of that multi-month range. On top of this, like many stocks (and the broad stock market in general), it’s getting quite overbought on a short-term basis. Thus is could/should pull-back further at the very beginning of the New Year.
What we’ll be watching is the 200 DMA on AMZN. That line has been a KEY line in both directions over the past 15 months. It provided tough resistance in Q4 of last year and Q1 of this year. Once it broke above that line (in March), it rallied strongly into July. That changed everything…and the 200 DMA became strong support for the stock in August & September. Once it broke below that line, the 200 DMA became tough resistance once again (throughout October, November and most of December).
Ok, so now what??? Well, it has popped back above that key line once again. In our opinion, if it rolls back over and takes-out that 200 DMA in any meaningful way…especially if it breaks below its June/October lows of $1,700, investors are going to throw-in the towel and the stock will get clobbered. If, however, it can bounce strongly off that 200 DMA…and break more meaningfully above its five-month range, it’s going to be quite bullish for the stock. (If it goes further…and breaks above its “double-top” high just above $2,000 in any significant manner later in 2020…it’s going to be a moon-shot for the stock!!!)
In other words, AMZN is not only at a key technical juncture, it’s at a critical one. Therefore, however it acts over the first 4-6 weeks of the year next year is going to be incredibly important for the stock over many, many months.
Apple (AAPL)…..It’s amazing how the narrative has changed on this stock. Remember when everybody was saying the company was no longer an innovative one…and thus wouldn’t advance it the way it has many times in the past? We were bullish on the stock back then, but now we’re getting a little more cautious on it. No, there’s nothing wrong with the company, but it is getting VERY overbought on a technical basis.
It’s weekly RSI chart has reached 85.5. That’s the most overbought the stock has been since 2012 (when it reached an only slightly higher extreme of 86.3….for one day…before rolling over hard)……Also, APPL is now at a 76% premium to its 200 week moving average…which is also the biggest premium since 2012.
Having said all this, we also have to note that AAPL reached a 149% premium to its 200 week MA back in 2012 before it topped out. On top of this, the stock’s weekly RSI reached a 255% premium in 2000…and its weekly RSI rose to a level of 92 back in 2005! Therefore, we have to admit that AAPL has reached even higher extremes before topping-out on both of these indicators a couple of times in the past.
However, there is no question in our minds that it is still VERY overbought on a near-term AND intermediate-term basis. Therefore, investors want to be careful about putting too much new money to work in this name as we move into early 2020. We just think that investors will get a chance to get more aggressive at lower levels at some point in the 1st quarter.
(One last note: You’ll see that the weekly RSI reached 80 in late 2014…and 84 in early 2017…and it was not followed by a major drop in AAPL in either instance. However, it still fell over 9% and over 11% respectively after those readings! So they still saw “tradable” pull-backs in those examples.)
Netflix (NFLX)…….NFLX has seen a very nice rally off of its September lows…but what’s next for the stock? Well, it’s coming off of a short-term very overbought condition just over a week ago, so it’s no surprise that AMZN has seen a mild 4% pull-back after its strong 32% rally over the previous three months.
We’d note that even though NFLX had become quite overbought on a very short-term basis, it did not get extremely overbought on an intermediate-term basis. Looking at its weekly RSI chart, it’s still well below the danger zone (that begins at 70). Therefore, after the stock works-off a bit more of its near-term overbought condition, it could/should have the chance to see another decent-sized rally leg in the first half of 2020.
What we’ll be watching is the 100 week moving average. That line has provided INCREDIBLY strong support for NFLX for many, many years. HOWEVER, it broke below that line in August of this year. THEN, with the bounce off the September lows, NFLX has been able to move right back up to that all-important 100 week MA. Therefore, if it can break more meaningfully above that intermediate-term line…after it works-off its near-term overbought condition…it should see another nice leg to its recent rally. If, however, it “fails” at this key moving average…and rolls back over in a substantial way over the next few weeks, it’s going to be very bearish for NFLX.
Therefore, this is another stock that stands at a critical level. Given the benign picture that its weekly RSI chart is drawing, there are certainly reasons to think it can rally further. However, if it rolls back over in the coming weeks and moves below $300 in any meaningful way, it will raise a yellow warning flag on the stock…..So we’re leaning to the bullish side of the ledger on this one, BUT any break material break below the 100 week MA will change our thinking very quickly.
We’ll finish our thoughts about NFLX by highlighting that the stock has formed a “symmetrical triangle” pattern…and thus any breakout of that formation (in either direction) will be a compelling development. However, since the 100 week MA has been SUCH an important line for the stock for SO many years, we think that is the more important item to watch.
Alphabet (GOOGL)…….Even though GOOGL should face some regulatory issues in 2020…given the bi-partisan condition of those regulatory proposals (in an election year)…the chart on this stock looks very good. The one problem is that is has become overbought on an intermediate-term basis, so it could/should be due for a pull-back in early 2020. However, it that pull-back is a shallow one, the stock could be off to the races later in the first half of the year.
Looking at the chart below, you can see that GOOGL was able to bounce off its 100 week moving average in June…just like it has EVERY time it has tested that line over the past eight years! More recently, the stock was finally able to break above the sideways range it has been in since the very end of 2017! (We readily admit that the “sideways range” we’re talking about has been a very wide one…between $1,000 and $1,300…but the stock was indeed range-bound none-the-less.)…..Therefore, the move above that line is a bullish development…and there is no question that the past six months has been very good for GOOGL on a technical basis.
As we said, the stock IS getting quite overbought on its weekly RSI chart. No, it’s not at a major extreme (like we’re seeing on the AAPL chart), but it’s still at a level that has been followed by pull-backs in GOOGL in the past. Therefore, we don’t want to chase it aggressively at current levels. However, if it can drop-back and successfully retest the top end of its old sideways range…and bounce nicely off of that level (near $1,300), it’s going to be very, very bullish for the stock.
We should note that it CAN break a bit below that $1,300 level without it creating any problems. Let’s face it, GOOGL did break slightly below its 100 week MA in late 2018 and in June of this year…only to bounce back very quickly. So we won’t turn overly negative if it breaks slightly below that line for a couple of days……..However, if it broke more meaningfully below that level, it would mean that its recent breakout was a “head fake” and that it was still range-bound. That would not be the worst thing in the world…as it would take a significant break below its 100 week MA before a major red flag would be raised on the stock.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.