We’re seeing a significant retrenchment getting underway. A lot of the high flying momentum plays of the last year or more are getting taking apart today with 4-5% declines becoming increasingly common. With the end to QE3 coming at the end of next month, it appears that a liquidity correction appears to be getting underway.
As is often the case, the stocks that had benefitted the most from all the easy money sloshing around, small caps and growth stocks appear to be taking the brunt of the pressure from traders now heading for the exits.
Two examples of the deterioration in momentum stock technicals and the growing risk of a significant selloff can be seen in the charts for Tesla Motors Inc (NASDAQ:TSLA) and Yahoo! Inc (NASDAQ:YHOO)
Tesla is looking vulnerable technically in so many ways right now. Over the last month or so, a head and shoulders top has been forming. The head earlier in September coincided with the most overbought RSI of the last eight months. Since then, the shares have been in retreat and steady declines in the RSI indicates upward momentum was slowing.
Adding in the Fibonacci retracements from the May low and the November 2013 low shows that the shoulders of the H&S top have been forming between Fibonacci retracements with the shoulders near $264.75 and the neckline near $250.00. Adding to the technical bearishness, the failed retest of 50 on the RSI as new resistance, a sign of momentum turning downward coincided with the right shoulder.
Tesla shares are looking vulnerable again today, having broken down through the $250.00 round number and the neckine of the H&S top, completing the pattern. Currently, its testing a trend support line and Fibonacci level near $247.90 where a breakdown would confirm the start of a new downtrend. If that occurs, next support may not appear until closer to the $240.00 round number of the next Fibonacci test near $234.30.
Yahoo has been trading back and forth in a channel between $31.75 and $41.75 for the last year. Ahead of the Alibaba Group Holdings Ltd (NYSE:BABA) IPO, the shares had a big run but now appear to have peaked.
Earlier this month, the shares broke through the top of their channel and rallied up toward $44.00. In doing so, the shares became overbought on the RSI. More significantly, a head and shoulders top (circled) formed in the RSI a rare but technically bearish pattern.
With the IPO out of the way, and Alibaba trading on its own and falling back under $90.00, Yahoo has also come under fire today. The shares have dropped from near $43.00 down through $40.00 to signal the start of a significant retreat. RSI has fallen under 50 to signal a downturn in momentum. From here, support levels may appear in $2.00 odd-number increments around previous highs and lows; $39.00, $37.00, $35.00, $33.00 then the channel low near $31.75.
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