DDOG - Mega-Cap Technology And Cybersecurity Stocks Leading The Market (Technical Analysis)

2023-11-08 13:52:53 ET

Summary

• Mr. Market has thrown up big tells on which sectors are likely to outperform going forward.
• My top two sector picks are mega cap technology and cybersecurity stocks, both of which are displaying relative strength.
• Price action in both these sectors have provided big bullish tells in the form of busted patterns, and swift recoveries from bearish catalysts.

After consecutive days of rallies in the equity indices, there is more clarity on the sectors that are showing relative strength. They are 1) mega cap technology stocks and 2) cybersecurity stocks.

I shall first touch on mega cap technology stocks.

Mega cap technology stocks leading

Looking at the weekly chart of the ratio of the Nasdaq 100 ( QQQ ) against the Russell 2000 ( IWM ), we can see clear outperformance in the former. The ratio broke out of a multi-month base in May, and has been trending higher since.

Weekly Chart: QQQ/IWM Ratio

QQQ has a high weighting of mega cap tech stocks, with Apple ( AAPL ), Microsoft ( MSFT ), Amazon ( AMZN ), NVIDIA ( NVDA ), Meta Platforms ( META ), Alphabet ( GOOGL ) ( GOOG ) and Tesla ( TSLA ) making up close to 50% of the ETF's weight. IWM on the other hand, is a proxy for the broad market, as it holds 2000 stocks, none of which takes up more than 1% of the ETF.

On the grander scale, QQQ/IWM ratio has taken out its highs set back in 2000, before the Dot-Com bubble burst. This is a significant development, as it means that the ratio has broken out of a massive 23 year base. I believe this is likely to pave the way for more strength in mega caps going forward, versus the broad market. The strong getting stronger.

Monthly Chart: QQQ/IWM Ratio

Whatever the reason for this does not quite matter, as price action is the collective expression of all market participants' wisdom. I would advise following the path of least resistance higher, instead of trying to fight this trend.

Yes, there may be certain periods where small caps might outperform mega caps. By and large, we should expect the opposite.

One setup I look out for is a busted pattern. Let me explain.

Apple ((AAPL)) was tracing out a descending wedge pattern, which is typically bearish. It broke below the key $172 pivot in late October, which should portend lower prices going forward. I have demarcated the boundaries of this descending wedge pattern in the chart below.

Daily Chart: AAPL

However, price action is not static. We can see that AAPL swiftly recaptured the key $172 pivot. This should send alarm bells ringing in the heads of bears.

Subsequently, AAPL announced earnings and dipped initially, before immediately recouping all post-earnings losses the very next day, and breaking out higher from this descending wedge pattern in the process.

This is a busted pattern, coupled with post-earnings price action that shows that AAPL wants to go higher in a hurry. There is a strong chance AAPL goes on to make new highs from here.

I wrote in mid-October that QQQ was likely to go on to make new highs . I continue to stand by this assessment.

Cybersecurity stocks leading

AAPL's price reaction after initially dipping post-earnings was bullish.

In similar vein, we are seeing the same in the cybersecurity sector.

On November 3, Fortinet ( FTNT ) sank after announcing earnings, falling by more than 23%. This should have a negative knock-on effect for other cybersecurity stocks, right?

Daily Chart: FTNT

Well, no. The reversed happened.

CrowdStrike ( CRWD ) sold off initially on the same day as FTNT selling off, but closed the session very strongly. This is a big tell that large institutions are taking advantage of the dip to accumulate the stock. CRWD has since gone on to make new 52 week highs.

Daily Chart: CRWD

We can see the same price action in Zscaler ( ZS ).

Daily Chart: ZS

The sector seems to be reacting in line with Datadog's ( DDOG ) strong earnings instead on November 7. Cybersecurity stocks simply waved aside FTNT's missed earnings, and pushed higher.

Daily Chart: DDOG

On aggregate, we can see that the cybersecurity sector ETF ( HACK ) has been building a base for the past 6 months, and is on the verge of breaking out higher.

Weekly Chart: HACK

Overall, to conclude, the recent market rally has thrown up many clues on the sectors that are likely to lead the market going forward.

The first standout sector is mega-cap technology, and the second is cybersecurity.

I bought into CRWD after witnessing the price action after the FTNT saga, and bought DDOG after it announced earnings, aiming to take advantage of its post-earnings drift higher.

I have shown in this article how to make use of price action analysis to read the clues provided by Mr. Market. Hope it helps!

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