At the start of each month I look at what sectors are starting (or ending) their period of seasonal strength. The Stock Trader’s Almanac does a great job at looking back in history and finding the periods of time that certain sectors have best performed. Starting in Mid-April, historically the Internet sector (FDN) has done well. Since 2005 the Internet sector has only seen two negative years for its seasonal strong period: 2002 and 2010. I use this set of historical data for equity sectors as a way to help screen and get ideas for potential interesting setups.
When looking at the latest price action for the First Trust Dow Jones Internet Index (FDN), I noticed the positive divergence that’s been taking place in the Relative Strength Index. With price making lower lows we’ve seen momentum bounce from an ‘oversold’ level to making higher lows.
I also noticed that volume has been just destroyed in this space. Looking at the On Balance Volume indicator, which adds shares on up days and subtracts shares on down days to give an idea of buying and selling volume, it’s been knocked down to levels not since early 2013. This tells us that heavy volume has been coming into FDN on periods of weakness. This is typically a bearish sign but it can also be viewed through a contrarian lens. Has the selling been overdone for this internet ETF?
What I’m watching for going forward is to see if FDN can get back above its 200-day and 20-day Moving Averages. The shorter-term MA has done a nice job of highlighting the short down trend that’s been created over the last two months, so a break there would help provide some confirmation that the overall up trend may be back in play. If we don’t see FDN clear these two Moving Averages and drops back under $53 while taking the RSI indicator with it then the bears may still be in control and heavy selling could continue.
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