By Colin Cieszynski, Chief Market Strategist and Jasper Lawler, Market Analyst, CMC Markets
Last week was a volatile one of many markets around the world and the technology sector was no exception. This was particularly seen in the reaction to Netflix’s earnings report. Although the company beat the street, and initial aftermarket reaction was positive, the shares were crushed the following morning in a big market washout. The back half of the week saw trading in technology stocks remain choppy but they finished strong with a 2.6% gain for the NASDAQ outpacing the S&P 500’s 2.0% gain and the Dow’s 1.3% advance.
This week has the potential to be a big one for technology sector trading with a number of major companies reporting. In addition to the consumer technology and internet companies in focus results are also due for a number of corporate tech providers like Citrix and Qualcomm.
Earnings season in general has been mixed with positive Q4 earnings offset by weak 2016 guidance, faltering momentum being a problem for momentum stocks. That being said, share prices and valuations have come down a lot in the last two weeks so expectations are a lot lower now than they were at the end of 2015. This has the potential to be a big week for the technology sector that could set the tone for trading for the next several months.
Netflix Reported Jan 19 AMC
EPS $0.07 vs street $0.02
Sales $1.82B in line
Forward P/E 441.7x
NFLX shares staged a big rally in the first half of 2015 but since August, a sideways channel between $97.40 and $129.40 has been emerging. RSI drifting under 50 and remaining below that level indicates that momentum has started to turn back downward. The brief throwover of $130.00 appears to have completed a double top as well.
In recent weeks, the shares have dropped into a trading range between $97.40 and $109.60 testing both sides of this area in the volatility of the last few days. The longer it takes to regain $110.00, the more vulnerable the shares look especially with the RSI indicating growing downward momentum. Next potential support on a breakdown appears near $87.50, where the August low and a 50% Fibonacci retracement of the previous uptrend converge.
Apple Jan 26 AMC
EPS Street $3.23 5.7% growth
Sales $76.6B 2.8% growth
Forward P/E 10.16
First up is Apple, who faces a make or break quarter. The company has been the leading tech company for the last several years but even though sales remain strong, the stock has been struggling as traders are increasingly wondering what is going to be The Next Big Thing to drive the next phase of growth.
Profit warnings from multiple Apple suppliers have the market concerned that Apple has cut orders, a possible precursor to the long-feared top in iPhone sales growth. The iPhone makes up two thirds of Apple’s revenue and the dependency is rising, even though Apple has released and updated other product lines. Annual sales grew 28% last year so the 30% fall from the record high maybe overdone. Still, the likelihood is, if iPhone sales growth falls, so does Apple’s share price.
Over the last year or so, a huge head and shoulders top has been forming in Apple’s shares price with a quadruple top head emphasising a massive wall now in place at $124.25.
Since the summer, the shares have been trending lower, completing a right shoulder then breaking the neckline and retesting it as new resistance to confirm the start of a new downtrend.
This big trend change in the share price suggests traders are increasingly thinking that the company’s high growth period is ending and that it is maturing again which could erode its premier stock status.
‘Currently trading near $100.00, initial support appears near $94.60 a 62% Fibonacci retracement of a previous uptrend. Should that fail, $90.00 could be tested initially but a full round trip back to $70 couldn’t be ruled out either.
To call off the bearish scenario, it really needs to retake $105.00 with next resistance near $109.75 if successful.
Facebook Jan 27 AMC
EPS Street $0.67 25.4% growth
Sales $5.37B 39.6% growth
Forward P/E 36.05
The increasing use of Facebook via mobile has helped the social network see strong growth in its user base and revenues in 2015, catapulting shares above $100 for the first time. Investors will also be looking for more evidence that Facebook can monetise Instagram and make up some of the $17bn hole in the balance sheet from its 2014 purchase.
Shares corrected alongside the overall tech sector in the first two weeks of 2016 but a strong rebound off $90 shows a rising belief the company can keep its momentum going.
FB shares had a quite a correction over the last several weeks, dropping back from near $110.00 back toward $89.50 where it completed a 38% retracement of its uptrend. More importantly, it successfully retested its main trend support line, keeping its long-term uptrend. intact.
The shares have been on the rebound in recent days, bouncing up into the $97.75 to $100.00 range which could potentially become a key area.
Should the shares blast through $100.00 on earnings, it would confirm that the broader uptrend has resumed and $110.90 could be retested. Should the uptrend fail and roll over, however, it would create the right shoulder of a Head and Shoulders top leaving the shares vulnerable to declines back toward $89.50 or even $82.90 over time.
Amazon.com Jan 28 AMC
EPS Street $2.74 171% growth
Sales $35.9B 22% growth
Forward P/E 133.9
Expectations are extremely high for Amazon.com to report a stellar quarter. By many accounts, online was one of the few areas of retail that did well this holiday season. Amazon had the biggest increase in seasonal staff hiring and it appeared to be continuing to grow its market share.
Although the shares took a big haircut along with other high flying momentum stocks in the recent market crunch, it still needs to deliver and could be vulnerable if earnings or guidance can’t keep up with high expectations.
Since peaking near $700.00 in late December, AMZN shares have been knocked back pretty hard, dropping back toward $540 to retest an old breakout point and complete a common 38% retracement.
Last week, the shares became oversold on the RSI and completed a bear trap washout below long-term trend support that appears to have shaken out the weak hands and since then the shares have been on the rebound. A trading bounce has been underway toward $605 which it needs to decisively retake along with 50 on the RSI to confirm the start of a new upleg on trend. On a breakout, prior resistance near $629.50 or the 50-day average near $647.50 could be tested. If $540 were to fail, next support could appear at the 200-day average near $525, or the $500.00 round number.
Microsoft Jan 28 AMC
EPS Street $0.70 (8.0%) growth
Sales $25.00B (5.5%) growth
Forward P/E 18.09
A declining PC market coupled with lost licensing revenues from mostly giving away its new Windows 10 operating system means Microsoft is expected to see a year over decline on the top and bottom line. The growth in recent years has come from its cloud computing service and reduced investment into the division this year could help boost profitability. Last quarter its Bing search engine also turned profitable.
Shares soared 10% after the last quarterly update which might be a bit of a tall order this time given current market conditions but a strong rebound from beneath $50 hints shares could be back close to records if earnings impress.
Last quarter’s earnings report ignited a big rally in MSFT shares with a breakaway gap signalling the start of a new uptrend after a year of trending sideways. In recent weeks, the shares have filled in the bap and retested their breakout point near $50.00 and have started to advance again.
Another positive surprise could give the shares a boost back toward $55.00 or $57.00 resistance but if shares fail to respond or if earnings are soft relative to expectations this time, $47.00 or $43.00 support could be tested
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