Cathie Wood’s ARK Innovation exchange-traded fund is significantly oversold and due for a bounce, but if it doesn’t get one the popular fund risks suffering a steeper decline that could spell some trouble for the broader market, says one chart watcher.
“With the big down day yesterday, ARKK actually violated a trendline that connected some notable lows going back to September, which isn’t ideal,” said technical analyst Andrew Adams, in a note for Saut Strategy on Tuesday. “It now
needs to recover this line quickly or risk breaking down in a possible waterfall decline.” (See chart below)
and other funds focused on previously highflying growth stocks are sitting on huge gains since the pandemic-inspired bear market lows of last March, turning Wood, founder, chief executive and chief investment officer of ARK Investment Management LLC into one of Wall Street’s star stock pickers.
But more recently, they have come under heavy pressure as investors, betting on a broad U.S. economic reopening and the release of pent-up consumer demand this summer, have favored more cyclically sensitive sectors and value stocks.
A sharp selloff in high-profile tech shares sent the Nasdaq Composite
and the more tech-concentrated Nasdaq-100
down nearly 2% on Tuesday, while ARKK fell 3.1%. The damage elsewhere was more contained, with the S&P 500 index
falling just 0.7% on Tuesday, while the Dow Jones Industrial Average
eked out a gain.
ARKK remains up 106% over the last 12 months but is down more than 6% this week and nearly 9% for the year to date, leaving it around 29% below its 52-week high shy of $160 in February. ARKK flipped between small gains and losses Wednesday, and was recently little changed near $113.30. Major indexes were modestly higher, with the Nasdaq up 0.2%.
Adams was cautiously optimistic about prospects for a bounce.
“Many of the ARK and similar funds that hold high growth stocks are now trading between one and two standard deviations below their 50[-day moving averages] where buyers usually enter,” said technical analyst Andrew Adams in a Wednesday note for Saut Strategy. “I don’t think the market needs to go down any more, so a bounce attempt should occur given all the nearby support levels.”
But if a bounce doesn’t occur, “I think we’ll then have to be a little bit more concerned,” Adams wrote.
For ARKK, Adams sees support in the $105 to $110 region, but if that fails to hold there isn’t much in the way of further support until closer to $90, making it very important that the fund and other high-growth areas of the market find a bottom soon. ARKK came close to hitting a band two standard deviations below the 50-day moving average on Tuesday, which means it is already oversold and hitting downside extremes, he wrote.
What are the implications for the broader market?
“If the high-growth areas start breaking support and taking the rest of the market down with them, then maybe the 3,980-4,000 zone in the S&P 500 will be retested after all,” Adams wrote. The S&P 500 was trading near 4,180 on Wednesday, not far off a record close of 4,211.47 set on Thursday.
A test of support in the 3,980-4,000 area would mark a pullback of only 5% to 6%, but given the damage seen in other parts of the market could lead to “some huge losses” elsewhere, he said. “I’d rather avoid that, so for now I think we can use yesterday’s lows as a test to see if that represented a selling climax in much of the market.”