One of the major themes last year was the rotation from tech into industrial stocks.
However, this year, that all started to unwind…
The Nasdaq has rallied a whopping 20% so far in 2023. That’s nearly three times the S&P 500’s 7% gain over the same time.
One tech stock that has ridden this move is networking equipment provider, Arista Networks (ANET). It has risen nearly 60% since January.
But it has recently been showing signs of overheating. So today I want to see how things might play out from here…
Classic Uptrend
On the chart below, you can see ANET’s uptrend since June last year…
The long-term trend (red line) has risen steadily. ANET made a series of higher lows at ‘1,’ ‘2,’ and ‘3’ – a classic bullish pattern.
Adding to the bullish sentiment, the 50-day Moving Average (MA, blue line) has tracked higher…
Arista Networks (ANET)
Source: eSignal
ANET formed its first trough at 1. The RSI formed a ‘double-V’ (left red circle) in oversold territory (lower grey dashed line). And after that, you will notice a series of repeating patterns…
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ANET rallied as the RSI tracked higher. And the 10-day MA (red line) broke above the 50-day MA.
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The RSI and ANET’s price started heading in different directions (orange lines) – a common reversal pattern. ANET’s rally then peaked and reversed. And the 10-day MA fell back below the 50-day MA.
However, after repeating that pattern at ‘2,’ the rally from ‘3’ was much bigger…
And this time, the 10-day MA broke above the 50-day MA and kept accelerating higher. The 50-day MA has turned markedly higher too.
Take another look:
Arista Networks (ANET)
Source: eSignal
Yet we need to watch the action around the RSI…
The RSI pressed up against overbought territory (upper grey dashed line) through February. Yet recently it retraced lower, also pulling ANET down.
However, as we came into March, ANET again surged higher… and we saw a rebound in the RSI. That allowed ANET to rise to its all-time high at ‘A.’
After reaching way into overbought territory, though, the RSI has recently turned lower. This caused ANET to recently turn down as well.
Now the RSI is hovering near the overbought line.
So what am I looking for around here?
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Hitting Our Target
The key thing I’m going to be watching this week is the RSI…
If the RSI keeps tracking lower, we can expect ANET to follow it lower too. The RSI returning to the middle of its range (green line) could see ANET pull back to around $150–155.
Yet to reach that target, the RSI needs to keep trending down. If the RSI goes sideways along the overbought line, then any pullback could be short-lived.
The other thing I’ll be watching is our MAs…
Right now, the 10-day MA seems to be topping out. If it rolls over and starts heading down, then that will add further confirmation to any down move.
From there, the 10-day MA crossing below the 50-day MA means that a bigger fall could be in the cards.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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