Zak Mir weighs in on Irrational exuberance and “new economy” stocks

There are a number of factors which come to mind as far as my perspective on new economy stocks such as Twitter (TWTR), Facebook (FB) and Google (GOOG) are concerned. The first is that all of them are personal favourites in terms of what they do and how they have all revolutionised the world in recent years. The second is the sky high valuations such companies tend to command, and what is more, are happy to similarly pay for groups which they takeover – the recent WhatsApp deal is a case in point. The final factor to remember is how the Dotcom Bubble burst in 2001, and how it took years for this area of the stock market to recover. The question now is of course whether the siren voices who have been calling the top of the Nasdaq / U.S. tech stocks for a year and more, may finally be about to be proved correct..?

Looking at the daily chart of the Nasdaq 100 and it can be seen that leading U.S. tech stocks as a whole have occupied a rising trend channel in place on the daily chart since October of last years and based currently at 3,550. This can be regarded as the minimum level the bulls can expect to get away with over the near term as I now expect the kind of dip seen at the end of January – when the price channel floor was also tested – to assert itself. The risk at this point though, if we are indeed topping out, would be that while there is no end of day close back above the blue 50 day moving average at 3,623, that red December support line target of 3,400 could be on tap, and perhaps as soon as the end of April.

Moving along to leading U.S. tech stocks and it can be seen that even the mighty search engine group Google is seeing its shares on the back foot. The downside here after the extended RSI window resistance seen since October looks to be as low as the 200 day moving average currently running at 1,010 on a 4-6 week timeframe, especially on any end of day close back below the floor of the January chart gap at 1,121 over the next few sessions. This scenario is possible even if the overall uptrend reasserts itself after that. A break above the 50 day moving average at 1,179 is seen as the earliest long re-entry signal at this point.

Given the way that I was championing the buy argument at Facebook from the mid $20s, and recently targeted $70 ahead of the WhatsApp deal, the latest decline for the shares back towards $60 is not too much of a concern. In fact, it would be something of a surprise if there was not a return back towards the former October resistance / January gap floor at $54.95. But, at least at this stage while there is no weekly close back below this zone, one would expect the weakness to serve as a buy opportunity, for one “final” leg of the mighty bull-run. In fact, given the longevity of the rally here, an opportunity to go long at the 200 day moving average, still rising near $48, might actually be welcomed with open arms.

However, even though I am a fan of new economy stocks, and particularly of micro blog group Twitter, this does not mean I am blind to the prospect of bearishness. For instance, the big technical sell signal on the Twitter daily chart came in the wake of this week’s $49.99 February support. This set up an “M” shaped breakdown. The implication is that while there is no end of day close back above the old support of last month, the downside could be as low as a December price channel floor at $37 as soon as the end of April.