We’re seeing more signs of a bifurcated market as a number of sectors are seeing a decline in breadth.
For our comparison, we use the percentage of companies that are trading above their respective 50-day moving average as a great measure of sector breadth. On average, this dropped by 17% over the last two weeks indicating that the market is splitting.
A decline in sector breadth or correlation means that the stock pickers are going to tend to outperform the index investors as they play both bullish and bearish trades. Today, Gap Inc (NYSE: GPS) and Netflix, Inc. (NASDAQ: NFLX) are drawing bullish trade cases while Alphabet Inc (NASDAQ:GOOGL, NASDAQ: GOOG) is making a case that it’s time to sell into recent strength.
Gap Inc (GPS)
We’ve seen an improvement in the retail sector as the group gets ready to head into a seasonally strong period of the year. Gap Inc shares have been participating, as shares have rallied over 50% from their May lows as signs of fundamental improvements are starting to take root.
Within the last two weeks, Gap’s 50-day moving average has transitioned into an intermediate-term bullish trend as it has engaged in an ascending pattern. Our studies show that the probability of the stock posting positive one-day returns more than doubles while this pattern is in place.
Gap will announce their earnings on August 18, and the company will have a bevy of technical support levels to help absorb any unexpected negative surprises. Though, from the sales figures seen, they should be able to meet expectations.
Yesterday’s trading action strengthened support from the 200-day trendline at $24.40, which is also transitioning into a bullish trend.
Gap shares worked off an overbought signal over the last few days, which is good to do ahead of earnings to avoid a “sell the news” reaction. Look for these trends to continue to improves and help GPS shares climb.
Netflix, Inc. (NFLX)
Market favorite, at least to beat up on, Netflix is trying to build a technical bottom to trade from. Shares of the streaming entertainment company have spent the last three months testing the $85 level on tepid volume, but that is changing.
The recent rally from this level was on heavier average volume, signaling that the line in the sand at $85 has gained some strength and is not likely to give way. This should give the bulls some confidence that Netflix may have seen its lows for the second half of the year.
Netflix shares are now positioned to move back above their 50-day to make a run at $101.50, which would be the last hurdle between its current price and a $110 print. With momentum building and the shares far from being overbought like many tech names in the market, Netflix looks likely to attract short-term technology traders for a move higher.
Alphabet Inc (GOOG, GOOGL)
Shares of Alphabet have been flying high after earnings that were better than expected. The technology giant’s shares have rallied more than 15% over the last months, putting it in a short-term selling strata.
A result of the monster rally is that Alphabet broke above its upper Bollinger Band, not an easy feat for a stock with the volatility of Alphabet. Yesterday, shares slipped back below this band, which suggests that we could see a reversion to the mean, which could target $740.
In addition, the stock registered an overbought reading from its short-term RSI. This is a simple and effective “sell into strength” indicator for most technical traders and will likely add pressure to shares over the next two weeks.
Finally, the simplest of them all, chart resistance. Shares of Alphabet have traded all of 2016 with a top-of-range value around $785. It is not surprising to see the shares pull back after retesting the top of their range.
For now, Alphabet shares are likely to see weakness as traders take some profits from the recent run. That said, keep an eye out for a consolidation that could lead to a break of $790, which would put the stock into a new higher trading range.
As of this writing, the Johnson Research Group did not hold a position in the aforementioned securities.
