Tech Stocks Down by a Lot, But Is a Relief Rally on the Way?

Over the past few months, technology stocks have really taken a beating. No matter where you look, there’s a lot of scrutiny. Tech stocks that were investors’ darling back in 2020 and 2021 are now down by 60% or more from their highs. Painful.

With so much volatility, one could be asking if it’s time to go all-in on technology stocks or if there’s more pain ahead.

Looking from a technical analysis point of view, the sell-off may not be done just yet, but there’s certainly some light at the end of the tunnel. A relief rally could even be on the way, but investors shouldn't get complacent whatsoever.

Nasdaq at Its 200-Week Moving Average

Please look at the chart below. It plots the Nasdaq Composite index over the past 10 years.

Keep in mind that the Nasdaq Composite’s constituents include small and large technology companies. So, the index can give us an overview of what’s been happening with technology stocks and what could be ahead.

Chart courtesy of StockCharts.com

Pay close attention to the 200-week moving average in the above chart. That moving average has acted as a strong support level for the Nasdaq Composite. This has been tested a few times over the past decade.

Each time the index drops to its 200-week moving average, it bounces back higher. Just recently, the Nasdaq Composite came down to this moving average once again. This could be a bullish sign.

Beyond the 200-week moving average, pay close attention to the basic support levels in the above chart.

The Nasdaq Composite has dropped to its lowest level since August–September 2020. This is around the time the market really started to move higher and technology stocks started to catch a bid. At that time, there was a spike in trading volume and a lot of excited buying. So, it's possible that buyers could come in and scoop up tech stocks.

Speaking of trading volume, over the past few months, it has been relatively flat despite the Nasdaq Composite coming down a bit. This says investors aren’t in panic mode. If they were panicking, there’d be a big spike in trading volume. Are investors holding and expecting a comeback?

The Flip Side

While there might be some buying of technology stocks, the Nasdaq Composite's moving average convergence/divergence (MACD)—a momentum indicator that's plotted at the bottom of the above chart—suggests that investor sentiment is extremely bearish and sellers still dominate the market.

When it comes to trading, it’s said that you don’t want to go against the momentum. It’s a major force that could really hurt your portfolio if you go against it.

Moreover, don’t overlook the fundamental reasons for investors ditching technology stocks: inflation over the past year or so has really spiked, and interest rates are moving higher. This hurts the valuations of tech stocks.

Valuations 101: interest rates are a key factor in finding the price of a stock. If inflation persists and interest rates go higher, there could be more pain for technology stock investors.

Analyst Take

During stock market sell-offs, many investors sell almost everything they have. Even the stocks of great companies get punished.

I believe it could be time for investors to start looking at quality technology companies with solid products, a growing market for their products, solid balance sheets, dependable cash flows, and management teams that have seen several business cycles.

Surely, if technology stocks sell off further, shares of quality tech companies could come down with the overall market. However, once the market bottoms, the stocks of those quality companies will likely be the first to get bought. Those who own them could reap immense rewards.

Lastly, in this treacherous market, it's important that investors focus on capital preservation.

This means having stops in place to protect themselves from downside, allocating funds accordingly, and taking profits when necessary. The absolute last thing investors should do with their stock portfolios is give away the gains they made over the years and let their losses run higher.