Applied Materials, DraftKings, 3 Others: Higher Highs, Declining RSI

Nasdaq stocks hitting higher highs but showing technical negative divergences may be a problem for shareholders. These 5, from diverse industry sectors, brought in enough buyers last week to establish yearly new highs — but without the confirmation of a key technical indicator.

The relative strength index, pioneered decades ago by analyst Wells Wilder, is not going along with a series of higher high prices in some celebrated names. Although much is made in the financial media about rallying stocks, the RSI, as it’s known, is giving pause to those who gauge what it could mean.

Applied Materials
AMAT

Shares that could have been purchased in early May for $112 are now worth $152. The move from June to July continued the bullish action but the relative strength indicator shows a negative divergence from the price action. It doesn’t mean that the rally in Applied Materials is over — it’s just a suggestion that the best may be done.

DraftKings

The rally that began in January has continued all year: from about $11 for a share to the current $31, almost a triple. Although the upward direction for price kept up during the month of July, the downward look of the relative strength indicator may be suggesting a tiring of the move.

ON Semiconductor

The stock traded at $70 in late April and now goes for $108 — a representative of the intense interest in the semiconductor sector over the period. The July rally is accompanied by a declining relative strength indicator. The combination of “suddenly higher” and “downward RSI” suggests that a rest may be in order.

Super Micro Computer
SMCI

From May to late July is a spectacular move for one of the most popular of the Nasdaq tech wonders. Super Micro’s blast from $100 all the way up to $326 is the stuff of trader’s dreams. The relative strength indictor is giving off a warning that gains like these might require a period of rest. You can see how volume (the bars below the price chart) has decreased from the late May period.

Workday
WDAY

The upward price movement from late May to the present is awesome: from the $195 level to $236 in little over 2 months. Wells Wilder’s relative strength indicator is cautioning that the quick rally may be too much too soon. Note that the late May volume (below the price chart) shows a decreasing trend into the month of July, possibly a confirming indicator for the RSI.

This type of technical analysis is imperfect, of course. Naturally, it’s important to consider other indicators and other factors before reaching any conclusions about stock or stock market direction. It’s clear that the Nasdaq tech sector has experienced a remarkable, once-in-a-lifetime kind of rally this year.