Is the FAANG Trade Dead?

The popular FAANG trade may be dead for this bull market cycle, with the five components facing headwinds from geopolitical tensions, product saturation and a bearish shift in sentiment triggered by numerous privacy issues. Many former cheerleaders now view these too-big-too-fail operations as Big Brother overlords, sniffing our private lives through chatty home assistants, data-mining sites and those handheld marketing tools we call smartphones.

FAANG ownership worked well until July 2018 when Facebook, Inc. (FB) broke ranks, dropping more than 40 points after missing revenue estimates for the first time since 2015. Alphabet Inc. (GOOGL) topped out at the same time and has dropped nearly 20% in the past three months, breaking the 200-day exponential moving average (EMA) for the first time since April. Netflix, Inc. (NFLX) just hit a six-month low, leaving just Amazon.com, Inc. (AMZN) and Apple Inc. (AAPL) to protect the interests of remaining bulls.

Amazon stock could be the next domino to fall in the bearish FAANG equation. The stock mounted $2,000 for the first time in August 2018, posting an all-time high at $2,050.50 and easing into a trading range that broke to the downside in early October. The stock just violated early October support and reached the 200-day EMA for the first time since November 2016. If Amazon stock breaks that level, Apple will be the sole component still trading above this major line in the sand.

Unfortunately, it's hard for technicians to interpret Apple's resilience as good news because downside momentum continues to escalate, making it easier for the stock to break the 200-day EMA than for the other components to remount resistance. Apple's moving average is now situated near $195, requiring a break of the psychological $200 level. That isn't likely to sit well with technically oriented shareholders.

Traders should expect a wave of bottoming calls when FAANGs bounce, but jumping in blindly is a bad idea given broad technical damage. Common sense would dictate buying Apple because it's the top performer, but the weakest plays often generate the most upside when markets are shaking out short sellers. As a result, Facebook looks like the go-to bounce play – but only for position traders with proven risk management skills. At the same time, buying the stock in hopes of hitting new highs looks like a prescription for failure.

Facebook shares just completed a 100% retracement of the March into July rally wave between $149 and the all-time high at $218.42. The stock undercut the March low on Wednesday but is likely to settle near $150 in the coming sessions, ahead of an oversold bounce. The 200-day EMA at $173 looks like a logical upside target for that uptick, translating into 10% to 15% profit potential before sellers reload positions.

This trading strategy will require a trailing stop, locking in profits as the bounce gathers steam. It isn't wise to "buy it and forget it" because the stock is now engaged in an active downtrend, and there are no guarantees that the upside will unfold as expected. Keep in mind that the worst thing that can happen if you're making money on this position will be to fall in love once again, allowing hope to overcome mathematics and technical precision.

Three of five FAANG stocks have broken their 200-day EMAs, signaling a potential end to the popular trading strategy.

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>