Trading Nation

Watch this level in tech—it could predict the next pullback, trader says

Key levels to watch in tech and Apple: Trader

Tech could tell us a lot.

That's what Mark Newton, founder and president of Newton Advisors, said Thursday on "Trading Nation" as the sector fell 3% alongside the broader market. Tech stocks opened more than 3% lower Friday.

Looking at the group on an equal-weighted basis — rather than a market-cap-weighted basis, the more common style of weighting used in sector ETFs like the Technology Select Sector SPDR Fund (XLK) — Newton said it could send the signal ahead of the next market pullback.

"Increasingly, we're starting to see evidence of tech starting to peak out, at least on a relative basis," Newton said, referencing a chart of the equal-weight tech sector relative to the S&P 500. Equal-weight tech is tracked in part by the Invesco S&P 500 Equal Weight Technology ETF (RYT).

"This peaked out right back in January of this year. When the market made new highs in February, tech did not participate," Newton said. "Since then, we've actually broken down under this little four-month uptrend, so, the broader trend from 2019 [is] still very much intact. However, it is a worry because tech represents about 22% of the S&P."

That could bode poorly for stocks, the technical analyst warned in a note to clients Thursday. If the broader tech sector starts to roll over and break below that longer-term relative uptrend, displayed above in orange, it "would signify a good likelihood that stock indices pull back to test recent lows," Newton wrote.

On Thursday, the pain stretched to shares of Apple, which fell more than 3% after Foxconn — one of the iPhone maker's key suppliers and the world's largest contract electronics manufacturer — reported its largest year-over-year revenue decline since 2013.

While Apple's recent losses haven't brought the stock below the longer-term uptrend that began after the market's December 2018 fallout, Newton was watching one particular level in the stock for further warning signs.

"The stock did move to new monthly lows on very heavy volume, the highest volume we've seen in months," he said. "When that happens, momentum really starts to roll over. So, my worry is not about in the next week. It's more about in the next few months. The stock has already made a decent rebound in the last few days, but my thinking is any failure here that comes back to take out [$]256 would warn of a much larger decline in the price of Apple, which, of course, being part of all these ETFs and indices, is gong to be a worry for technology and the market as a whole."

Apple shares began trading around the $283 level on Friday, and are now down about 2%.

Gina Sanchez, founder and CEO of Chantico Global, was concerned about whether Apple could make a sustained rebound from its depressed levels.

"It's getting hurt from both the supply chain disruption as well as demand," she said in the same "Trading Nation" interview. "Now, look, if you are a long-term investor, you know that some of that demand is going to get recouped later. This isn't like food or things that you're just sort of never going to recoup. You will eventually make those purchases if they're delayed."

"Apple's issue is that its valuation actually got quite high," Sanchez said. "It was priced to perfection, so it didn't have much room to maneuver this kind of a disruption. So, the challenge will be does it bounce once we get past this? And I think that the valuation was just high enough that it may not bounce as much. That is the danger."

Tech as a whole faces a similar problem, having had the "highest valuation in the entire market" leading up to the most recent bout of volatility, the CEO said.

"It just was pricing in a lot of growth that you may not necessarily get. Now, if you are a long-term bull and you believe that this is a long-term secular cycle that is going to continue, then you would actually buy these values right now. But we're not sure that they're values yet," she said. "We are looking at the economy naturally rolling over and that rollover being accelerated by this coronavirus issue, so, we're not sure where we're going to land at the end of that and what that means for valuations. And technology is still very highly valued and it just hasn't budged. In a lot of this downturn, it has maintained its valuation. So, that is a double-edged sword."