Tuesday was not a good day for the market, particularly tech stocks.  What happened and what am I expecting to see happen next?

First, let’s talk about what just happened to tech.  With a report that Apple iPhone sales fell 24% in China, which followed a $2 billion antitrust fine from the EU, Apple stock and much of the tech market have greatly struggled to start the week.  To see the technical picture, let’s look at the chart for AAPL stock:

As you can see, AAPL is very weak as it continues to fall further below all of my key moving averages, and that could spell trouble for the NASDAQ 100.  Remember, the NASDAQ 100 uses a modified capitalization method that is very similar to market cap weighting, and as one of the largest companies in the US, AAPL is nearly 8% of the index.  So, when AAPL is weak, it tends to result in weakness for the tech index.  So, let’s look at QQQ to see the NASDAQ 100 performance on the back of AAPL weakness:

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Falling, but not cratering, the tech sector is having an expectedly weak start to the week.  However, the pullback is still only to the 20-Day Moving Average and an overall bull trend still seems to be in place.  One of the biggest driving sectors of tech is semiconductors, and I often look to the ETF SMH to see how one of my favorite leading indicators of tech is performing when I’m not sure about the next move:

SMH continues its strength, so I’m that much more inclined to buy into a dip in the market that’s being widely driven by one (very large) company.  Add to that my indicator of bond yields discussed last week, represented here by the ETF TLT, and you can see why I’m just not all that concerned:

TLT continues to be firm as expectations now indicate a potential for lower long-term bond yields, and that’s not a bad thing for stocks right now.

So, with all of this in mind, I’m looking for ways to play a potential bounce back in the market.  AAPL may be weak, but it’s very possible that we’re just looking at another opportunity to buy the dip, not a need to sell the market.

Of course, if we start to see other signs of imminent and greater weakness in the market, such as greater participation in the selloff and semiconductor weakness, things could change fast, so I want to be actively monitoring my positions and my watch list for new entries and potential exits.  Additionally, utilizing options to leverage the potential returns and define my risk can be a very powerful tool in these types of markets.

So, as always, please go to http://optionhotline.com to review how I traditionally apply technical signals, volatility analysis, and probability analysis to my options trades.  And if you have any questions, never hesitate to reach out.

Keith Harwood