Volatility & FANTAG Stock Patterns

The unwavering uptrend in stocks in the last few years may be seeing disruption with the return of volatility in 2018. Institutional and retail investors are looking for various gauges to measure the effect of volatility and how that’s trending in the coming quarters. Most analysts think there may be more upside and opportunities to come this year even with (or perhaps because of) the emergence of geopolitical issues.

Technology stocks have been the darlings for equity traders during the last few years, especially popular FANTAG stocks: Facebook (FB), Amazon (AMZN), Netflix (NFLX), Tesla (TSLA), Apple (AAPL) and Google’s parent Alphabet (GOOGL), which had been on a tremendous run (see “FANTAG performance,” below). The acronym “FANTAG” (variation of FANG) has sprung up to represent high tech stocks (see “FANTAG Stock Patterns,” MT January 2018). 

In 2017, the Nasdaq composite rose 28.24% compared to 55.06% for Netflix, 53.38% for Facebook, 45.70% for Tesla, 55.96% for Amazon, 46.11% for Apple and 35.58% for Google. In 2018, the rise of volatility has significantly reduced FANTAG stock performance with the exception of Netflix (up 62.35%) and Amazon (up 22.35%). 

Volatility in the Markets

Stock traders waited all of 2017 for volatility to return to the markets to take advantage of market trend moves from FANTAG Stocks. 

For many years, professionals and retail traders learned to short the spikes in short-term volatility to generate alpha. The absence of volatility spikes has created massive momentum-based directional moves in equities. In January/February 2018, the increased volatility disrupted the “short volatility” trade, and even caused the liquidation of Credit Suisse’s (CS) sponsored Short Volatility Exchange-Traded Note (XIV). The rapid return of market volatility woke up bears as sentiment started to shift from “buy the dip” to “sell the rally” (see “The return of vol,” above).

The “FANTAG Stock Patterns” article on Fantag stocks, MT October 2017, detailed the chart patterns that were in place in the last quarter of 2017, which takes a look at where those patterns stand given the return of volatility in the first quarter of 2018. 

Facebook 

Facebook rose 53.38% in 2017. The move was telegraphed by an ABC Bullish pattern, which developed from July 2016 to December 2016, and was detailed in MODERN TRADER (“Trading ABC Patterns, Modern Traders, December 2016). A long trade was triggered above $117.70. Three profit targets were triggered all the way up to $180 by January 2018 when FB reached a high of $195 (see “Facebook Pattern,” below). 

In March 2018, a whistleblower revealed that Cambridge Analytica accessed personal data of more than 50 million Facebook users causing a controversy regarding how Facebook protected its users’ information. FB retraced about 18% and formed a corrective ABC Bearish pattern. The ABC Bearish pattern entry was to sell short below $183 with price targets of $165 and $150. By April 15, 2018, Facebook reached both of these targets. The future of Facebook is still positive and Facebook remains in bullish-trend mode, but many fund managers are voicing some skepticism regarding the fixing of recent privacy concerns raised by the U.S. Congress.

Amazon 

Amazon has been rising in a Parabolic Arc pattern since 2005 from a low of $5.51 to a current high of $1,617 (see “Parabolic Arc: What Goes Up...,” Modern Trader, November 2016). Amazon went up 55.96% in 2017. The recent market volatility has finally caught up with Amazon after President Donald Trumps’ comments regarding its postal service usage. Amazon has been an impressive performer for many years and probably will continue its uptrend after it undergoes a brief correction in 2018. Parabolic patterns are extremely long-term patterns, but often return to 50% to 62% of its prior rise. Even these corrections could take multiple years.

Netflix 

Netflix, the world’s largest video streaming company, saw great growth in 2017 and is expected to grow more in the coming years. NFLX has been trading in a large bullish five-wave pattern (similar to Elliott Wave) since 2009; from a low of $2.23 to a high of $204 in 2017. In 2018, Netflix had an impressive run in the first quarter rising 62.35% year-to-date in 2018 alone.

The emergence of 2018 market volatility affected NFLX stock as it retraced about 12% to drop from the high of $333 to $271. Even though NFLX subscriber growth is increasing substantially in international markets, NFLX may be reaching the exhaustive phase in its 5th wave run. There are no clear corrective signals yet, and upcoming earnings may signal some clues for the year 2018. 

Tesla 

Tesla is an automaker, energy storage company and solar panel manufacturing company founded by its innovative CEO Elon Musk. Tesla rose 45.70% in 2017 as it traded in a rectangle channel pattern from a low of $171 to $291 (see “Trading Rectangle Channel Patterns,” Modern Trader, June 2017). TSLA’s rectangle channel upside targets were from $348 to $405. In 2018, TSLA reached a high of $389 and started seeing volatility effects as it retraced about $140 to $250. TSLA’s recent technological challenges may not continue into 2018 after impressive years in 2016 and 2017. However, for Tesla to produce a short signal based on the rectangle channel it would need to drop below $171. 

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