When a stock drops a bit on earnings news, it is usually not a huge problem. But when leading stocks in a sector drop hard, leaving a broken pattern on their charts, that is a different story.
Such is the case with tech stocks right now. Last week was a bad one for several popular names including Netflix (ticker: NFLX ), Microsoft ( MSFT ), Google-parent Alphabet (GOOGL ), and Apple ( APPL ).
Most fell following weaker-than-expected earnings results although Apple fell on expectations that iPhone sales were softening. Apple will report its earnings Tuesday.
The rough week for tech started last week with Netflix’s disappointing first quarter results coupled with a slowdown in subscribers. On the charts, the news led to a bearish pattern, called a downside breakaway gap, on huge volume (see Chart 1).
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A gap is an area on the chart where there is no trading. Rather than trending smoothly, prices jump from one level to the next as supply and demand get too far out of equilibrium. The term “breakaway” refers to the fact that prices also broke down from a pattern – the rising trend, in this case.
Netflix is now broken, and while prices are low, broken stocks are not cheap. They usually do not rebound quickly. After all, such a huge single-day decline is a shock that usually needs an extended period of time to heal as both bulls and bears figure out their next moves.
The next stock is Apple. As with most of the market, it started to rally nicely in February and gained more than 20% into its mid-April high (see Chart 2). Since then, however, it has been all downhill.