With the shift out of many of the momentum names that led last year strong performance, we’ve seen the Internet Index take a beating recently with the First Trust Dow Jones Internet Index (FDN) off 15% from its high in March.
When it comes to technical analysis many traders fall into one of two camps: trend following or mean-reversion. I have a tough time picking one, but I lean more towards mean-reversion. Mean-reversion traders view the market as one big rubber band. When it becomes too extended in either direction it’s likely to snap back, or revert back to its previous trend.
I think the Internet index is showing a great example of a potential mean-reversion. On May 18, 2012 I wrote a blog post looking at the Average Directional Index (ADX), specifically the Minus Directional Indicator (-DI) that makes up half of the overall ADX indicator for the S&P 500. ADX is often used to measure trend strength and help forecast potential trend changes. I prefer to use it for signals of when a short-term trend may be overdone by monitoring the level of the -DI (the red line on the bottom panel of the chart below). Back in May ’12 the S&P was off by about 7% from its 2012 high but the -DI had broken above 40 which had previously marked an intermediate lows for the equity index. Price in fact bottomed and we saw an uptrend for the next four months.
We are now seeing a similar setup for the Internet ETF (FDN). I’ve marked green dotted lines on past instances when the Minus Directional Indicator has gotten above 38. As you can see, this has led to at least a short-term bottom in the price of $FDN. To support the potential bounce in the internet ETF, we also have price holding support at its 200-day Moving Average and the Relative Strength Index (RSI) breaking into ‘oversold’ territory.
We’ve seen a fair amount of selling in the names that make up FDN and its possible traders aren’t done shedding shares. But it appears that with the current set of price data, the risk/reward favors a short-term bounce as price holds its long-term moving average before sellers will get the opportunity to take back control. We’ll see where price takes us.
Disclaimer: The information contained in this article should not be construed as investment advice, research, or an offer to buy or sell securities. Everything written here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.
