The Technology Sector SPDR – Weak Volume Equals Lack of Conviction

By | November 10, 2018

In the month of October the technology space, as represented by the Technology Sector Select SPDR Fund (XLK) dropped over 10%, and moved below its 200 day moving average for the first time in more than two years.

Nearly all the major players in the sector were hit and hit hard. Over the last three weeks there has been what many have characterized as an oversold bounce. Few have been confident enough to call it a bottom.

The XLK chart shows the low made in October and the subsequent rebound. The upside move pierced through a short term downtrend line and recaptured the 200 day moving average.

These are encouraging developments for the bulls but there is one potentially overriding issue. Volume last week was anemic.

The volume bars are highlighted at the bottom of the chart. Notice there wasn’t one day last week when volume exceeded the 50 day moving average of volume.

The graph below the volume bars illustrates the percent difference between daily volume and the 50 day moving average of volume. On Monday it was more than 50% below the average and even on Wednesday when the XLK rallied nearly 3%, the volume level was 18% below the 50 day average of volume. That is unusual for a day with such bullish price action.

The contradiction between price and volume reflects a lack of investor conviction. It is the contextual back drop going into a new trading week. Obviously, moving back up above last week’s high is necessary to maintain the bull case, and breaking back down below Friday’s low and the trend line is important for the bear case.

But in order to sustain either the bullish or bearish scenario, volume will have to pick up considerably. The rule applies to any stock in any sector. Without volume and committed directional money flow markets can be easily manipulated and traders made victim of volatile whipsaw price action.

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