The AI Boom That Catapulted Tech’s Impressive Weekly Outperformance
It's no surprise that the Technology sector was the most talked-about sector of the past several weeks. AI FOMO was everywhere on Wall Street as Nvidia (NVDA) and other AI stocks pulled ahead of their non-AI counterparts. In the end, Tech stocks, in general, kept the Nasdaq well ahead of the broader S&P 500 index ($SPX) and the large-cap Dow Jones Industrial Average ($INDU). The strong Tech momentum had investors wondering whether the move had real substance behind it or if it was driven by AI exuberance.
A Technical Look at the Tech Sector
Below, the daily chart of the Technology Select Sector SPDR Fund (XLK) shows an uptrend in play. Is it ripe for a pullback?
CHART 1: DAILY CHART OF SELECT SECTOR SPDR TECHNOLOGY ETF XLK. The ETF has been in a strong bull rally fueled mostly by AI stocks. But is the rally sustainable? It helps to look at technical indicators, such as the Ichimoku cloud, stochastic oscillator, Chaikin Money Flow, and market breadth.Chart source: StockCharts.com (click chart for live version). For educational purposes only.
XLK is at the $166 price level, having pulled back slightly from its 12-month high of $168. Still, it's well above its 50-day and 200-day simple moving average reading, while XLK appears to be on the verge of a parabolic curve.
Let's look at the Ichimoku cloud to see what kind of forward-looking trend scenario and support and resistance it might project. The Ichimoku cloud bullishly plots resistance 26 days ahead between $154 and $158. This could be an indication that XLK may be over-extended. In other words, it has plenty of room to fall.
The Stochastic Oscillator displayed in the top panel above the price chart suggests that XLK is in overbought territory, which supports the possibility of XLK falling to the $154–$158 level in the next few weeks.
It helps to see if the price momentum is driven by strong buying pressure. The Chaikin Money Flow (CMF) indicator helps identify whether buying pressure is strengthening or weakening. The CMF is showing divergence, which suggests that although price is rising, buying pressure is dwindling.
The XLK High-Low Percent ($XLKHLP) indicator helps to see whether stocks within the sector have reached new highs or lows and the frequency and recency of these new highs and lows. It's a lagging breadth indicator, yet it can support a thesis that might find the sector in a bullish, bearish, strengthening, or weakening condition.
The $XLKHLP is displayed in the lowest panel below the price chart. It's been moving up and down by a wide range since the start of the AI boom, but, overall, it gave some bullish indication that stocks in the sector (probably AI-related names) were reaching new highs. But the indicator has fallen since reaching a high of $168, which further confirms the price action in XLK.
On an industry-group level and on a monthly scale, Semiconductors appear to lead the pack (again, most likely AI-driven), as you can see below.
CHART 2: MONTHLY SECTOR SUMMARY. Semiconductors in the lead.Chart source: StockCharts.com. For educational purposes only.
But if you look at the industry groups over a quarterly timespan, you'll see that "chips," lagging in third place, only came to dominate within the last week, likely spurred on by NVDA's recent earnings and the ensuing AI FOMO frenzy.
CHART 3: STOCKCHARTS PERFCHART OF TECH SECTOR COMPONENTS.Chart source: StockCharts.com. For educational purposes only.
If you look at the stock that served as a catalyst to all this—NVDA, the chip stock that also happened to reach the elite $1 trillion market cap level last week—you see a similar reading to that of the overall sector.
CHART 4: DAILY CHART OF NVIDIA STOCK.Chart source: StockCharts.com (click on chart for live version). For educational purposes only.
While the overbought Stochastic readings and CMF divergences are apparent, note that NVDA appears to be exhibiting an exhaustion gap pattern on high volume. This would typically hint of a pullback. But the Ichimoku cloud level and the Volume by Price bar levels seem to converge between the $290 and $300 range, which should serve as ample support (based on the volume of trading and representation of buying pressure, in addition to the cloud itself). A break below that would see support at $260, slightly below the March and April lows.
The Bottom Line
The Tech sector has seen impressive performances this week, with AI companies, particularly Nvidia, leading the charge. However, indicators suggest a possible overextension in the sector, and while AI-related names have reached new highs, there's a looming possibility of a pullback.
It's crucial for investors to remain vigilant, as the apparent "AI FOMO" could be followed by a period of market correction, especially in overvalued stocks. Despite this, a strong support level exists, reducing the potential for extreme losses. The situation underscores the need for balanced investment strategies that factor in both the potential rewards and inherent risks of investing in high-growth sectors like AI.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
