Opinion: 4 of the Magnificent Seven stocks are losing their mojo

Although many investment practitioners are skeptical of TA, when combined with fundamental analysis, technical analysis can be a powerful tool in a trader’s or investor’s toolbox. Those who claim that technical analysis is nothing but voodoo probably do not know how to use it properly. 

One of my favorite indicators is the relative strength index (RSI), created by J. Welles Wilder in 1978. RSI can be seen on any basic stock chart, and works as follows: When RSI is at 70 or above, it’s an early warning that a stock or index is overbought (i.e., overextended to the upside). When RSI is at 30 or below, it’s a signal that a stock or index is oversold (i.e., overextended to the downside). I would never trade a stock unless first looking at RSI on a chart. 

In my experience, the RSI on the S&P 500 has been deadly accurate in warning of overbought conditions. For example, on Friday, Dec. 15, RSI on the S&P 500 reached 79. For an index, this a dangerously high overbought reading. On Dec. 17, I warned in my blog that although no one can predict when the S&P 500 and the other bellwether indexes would reverse, a pullback was imminent. Sure enough, on Dec. 20, the S&P 500 lost 1.5%, interrupting its rally.

The Magnificent Seven 

Now, let’s look at a handful of technical indicators for the Magnificent Seven. Not surprisingly, all of these stocks are tied to the Artificial Intelligence (AI) phenomenon, an emerging technology that is reshaping business models in virtually every industry. These companies are leveraging their future by heavily investing in AI technology. 

The RSI of the Magnificent Seven stocks spiked a few weeks ago but has since retreated. When RSI spiked, it was a flagrant warning sign. Nevertheless, RSI can never predict with perfect accuracy when a stock or index will reverse, only that it is in the danger zone. 

Currently, all of the Magnificent Seven stocks are settled into an RSI between 50 and 60. This means they still have room to move higher in the short term before they get too overbought. 

The stock with the highest RSI at this writing is Meta Platforms, with an RSI of 67. So although Meta is overbought, it is not at extreme levels (over 70).    

Relative strength

All of the stocks in the Magnificent Seven have strong charts (i.e., the shares trade well-above their 50-, 100-, and 200-day moving averages). This is a highly positive sign. But four of the seven — Tesla, Nvidia, Microsoft and Apple — are stalling, according to their daily stock charts. 

The charts of these four market leaders have flatlined recently. These stocks have delivered a prosperous year but according to current TA readings, they may struggle in the near future. 

Keep in mind that while technical analysis is an inexact science, it does give important hints and ideas as to what might occur in the short term. If trading using technical analysis, confirm with a mix of indicators and analysis before placing a trade. 

Here is the recent RSI for each of the Magnificent Seven: Meta Platforms, 67; Amazon.com, 64; Alphabet, 64; Tesla, 58; Microsoft, 56; Nvidia, 55, Apple, 54.

If the Magnificent Seven continue moving higher over the next three months, keep an eye on RSI. If RSI moves above 70, that is a warning sign.

On occasion RSI has reached levels of 90 or above with certain individual stocks. If RSI hits these levels and stays there, it’s called “burying the needle.” It means that RSI is stuck at such a high level that the oscillator either flatlined or “hit a wall.” In this example, look at other overbought/oversold indicators for clues. 

Extreme overbought readings combined with spiking charts reflect serious investor overconfidence. History has proven that this type of market tends to occur before market corrections and crashes, like in 2000 and 2008. This is not to say the market will crash or correct; it is to say that these overbought levels cannot be sustained. 

If RSI rises too far and too fast, taking money off the table is a wise decision (but this doesn’t mean to sell everything). Most importantly, stick to the strategies that brought you this far and scale back your risk.  

Michael Sincere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks.” 

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