Technology stocks showed renewed weakness last week. Was the strong rally in the second half of March a mere bear market rally?
Bears note that tech stocks remain in a downtrend, with the Nasdaq rally losing steam once it approached its 200-day moving average. However, the scale of the prior rebound – after plummeting in January and February, the Nasdaq recovered more than half of its losses in a 15-day period – augurs well for tech stocks, says SentimenTrader's Jason Goepfert.
“Bear markets tend to see weak buying pressure that falters quickly,” says Goepfert. During weak markets, it’s common for stocks to recover less than a quarter of their prior losses over a 15-day rally. Most of these rallies end up failing, leading to losses and lower lows.
In contrast, “swift and significant” retracements of declines have a “strong tendency” to occur at meaningful lows.
He found 12 instances where tech stocks enjoyed particularly rapid rebounds. Two months later, equities were higher on all but one occasion, and the risk/reward was “massively skewed to the upside”.
