ARKK Opportunities

January 6, 2023No Comments

Today we are going to talk about the ARKK Innovation ETF. Now, many of you may be familiar with them, run by Cathie Woods. She ran a very, very successful ETF that invested in innovative technologies, just like the name implies, and the fund was really buying leading-edge stocks, companies that you’re familiar with. For example, Zoom, the device that I am use to record my videos. Things like Tesla, phenomenal technology using electronically controlled cars. It’s just many, many of these stocks are truly innovative leaders. The problem was that they became vastly overvalued. I always tell people, look, it doesn’t matter if the company is the greatest thing since sliced bread.

If investors bid that stock up too high, then the stock’s going to fall. If anybody is familiar with my blogs over the past two or three years, I have been warning investors about the ARKK ETF in particular, and the components of it and the FAANG’s, which are not really part of the ARKK ETF, but the aggressive growth movement that was taking place between 2020 and the end of 2021, where these guys could do no wrong and the multiples, the valuations and the charts just got parabolically overbought. So that didn’t change the fact that many of these companies are great companies, but it did imply that people were paying ridiculous prices. So the question now is, is there an opportunity in the ETF or any of the top holdings in that ETF? So we’re going to explore that today. So we want to look at the ETF and we want to look at its top 10 holdings. Let’s take a look at the ETF first and this is going back to 2015. You can see that the fund was pretty thinly traded. It was literally compared to the volume in the past couple of years, there was none almost to speak of. It based, it broke out, did a nice trend over 2017 and part of 2018, based again, kind of went sideways in the choppy trading range and there’s the parabolic move. This was the nonsense that I was warning investors about during 2020 and 2021. I was telling people this is nuts and I was correct.

Go back to my blogs. You’ll see I was very critical of, not the fund and not the stocks, but the ideas of how much value investors were implying. But something’s changed and that is the ETF has come down to an old support level that really was in place since 2018. Meanwhile, at the bottom of the chart is the MACD indicator, it’s a really long-term momentum indicator. This is a weekly chart and you can see over much of this year it’s bottomed and in fact, has been moving up against a down tape. Isn’t that interesting? That is called divergence. MACD is a really big, long indicator so it tells you something way ahead of the time. It’s not a coincidence indicator, like say the momentum on Stochastics, which is very, very short term

 

You can see it’s still heading down but we are getting even RSI, which is more of a midterm look. I use the traditional 14-day RSI or 14 weeks in this case because it’s a weekly chart, but a 14-period look lookback for RSI. You’ll notice that the two longer-term momentum indicators are diverging positively against the down tape of ARKK. So maybe there’s an opportunity, especially because it’s coming into a support level from a few years ago. So let’s take a look at the components. What I always do, whenever I look at an ETF that’s got a theme, now when there’s a sector, I’ll still look at the components, but you really have to be careful when there’s a thematic play here. There is most definitely a thematic play in this ETF. It’s all about innovative stocks.

So, as I said, Zoom is right at the top. Interestingly enough, it used to be Tesla at the top, but they’ve kind of fallen a lot so I guess Zoom has taken its place. It’s 9% and Exact Sciences is also very close to 9%. So these are the two we really want to pay attention to but even the top five or so are all in the 5 to 6% range. In fact, this is the top 10 holdings. So we’re going take a look at all of them, and we want to assess the health of these individual stocks and then make an assessment on the ETF. Then we want to look at the individual stocks themselves and see if there’s an opportunity. Now, whenever I look at these stocks, I must give you a forewarning that there is an effect that goes beyond the technicals that we have got to keep in mind and that effect is that when interest rates are rising, this is really hard on innovative companies, on growth companies, because they borrow a lot and their borrowing costs go up.

So their profitability shrinks in that environment and also, we are very likely going into recession. If you read my blogs, you know I’ve been pounding the table. I strongly believe we will be heading into a recession, and that’s maybe not so great for some of these players. So let’s, from there, take a look and we’re going to start off with Zoom which, as I said, is well over 9% of the holding so we have got to pay attention to this one. In a downtrend, I didn’t draw a downtrend line but you can see that there is a support level coming in that really did hold between 2019 – 2020. So the question right now is, will it hold?

We have to watch. There’s an old resistance level that comes in somewhere around $120 and the support level is somewhere in the high 60’s. So we want to watch to see if Zoom bounces off of that. Let’s take a look at the second biggest holding, which is Exact Sciences. This is an interesting chart because Exact Sciences is a pretty good-looking chart actually. It’s a bullish-looking chart. For any of you that know the basics of technical analysis, it looks like the downtrend might have broken. I didn’t draw the line, but you can kind of see that and, by my rules, we took out the most significant last high. So it was a series of lower highs and lower lows, but we took in that last low in October, and it paused out at that previous high from August, and then it broke through recently.

That’s extremely bullish. So we should really be paying attention to this stock on its own, and we should also be looking at it as a factor within the ARKK ETF. Next, let’s look at Tesla. And Tesla has the opposite situation to Exact Sciences, which is, it’s broken down. You can see that here. It had huge support going way back to 2020, late 20, and it broke down. Now there is some support coming in. I think it’s around $120 or so. I drew a thinner line here, but we really want to see it cluster in that old area where it has clustered back in 2020 before we should enter or consider Tesla. So that’s a bit of a point against the ETF, but nevertheless, it’s getting close to that $120 point. So we want to keep an eye on it.

Okay, Roku. That’s a downtrend and there is not even any support here. You see the old support might have come in somewhere around, let’s call it $80. I didn’t draw the line because it’s broken through and there’s really no sign of this stock stopping. I own one of these units on my tv. They are wonderful products but there’s only so many they can sell. Next stock we will take a look at Square and they have definitely come down to a support level that goes way back to 2019 and it may just be finding support. Now it’s still in a downtrend. You can see lower low, lower high, lower, lower again, lower high. So it’s in a downtrend. But let’s take a look and see if this old support area does prove to be an area where it might bounce off.

Watch for a break of that trend line. It’s a good enough case that we could keep our eyes on it because it may just break out but we don’t predict, we just react.

So PATH, the fourth largest stock in the portfolio. Definitely in a downtrend. We need not apply to this particular stock. Now Shopify, a Canadian company, they are again seeing an old level of support from 2019. They’re finding that support. They have not broken out. As you can see, they tried recently just a month ago and failed. So I’m of the opinion that if this stock were to break somewhere around $60 and hold, it would be actually quite bullish. So we really have to keep our eyes on it. It’s not an overly bearish chart, but it’s not a bullish chart, but it’s definitely one of those factors within the ARKK ETF that might give it some upside in the future.

So let’s keep an eye on Shopify. Teladoc Health same idea. It’s in a downtrend without a doubt. There’s a possibility of a level of recent support, not old support as you can see, but it may be basing. You can see the chart is looking a little bit less downward, but really you are going to have to see that trend line break. You’re going to have to see a breakthrough, let’s call it $45 or so and we’re nowhere near that right now. So I’m going to say it’s not really a good-looking chart at this point and we have to consider it still in a downtrend. Now, Beam. Beam definitely is showing some support at a level that was seen in early 2022, early of this year as I record this. You can see that there was a bit of a neckline after a selloff over this summer and it climbed, hit the trend line, and has fallen, but it seems to have come back and is finding support at that old neckline.

So this is interesting because Beam may be, again, one of those stocks within the ARKK ETF that can help support it and might be an okay trade on its own. But again, it’s early and, if we look at this, it might even be failing that support level. So most certainly, this is not a stock to buy today. In fact, every stock we’ve talked about, with I think one exception, is still in a very wait-and-see mode.

Alright, CRISPR Therapeutics, and I hope I’m saying that correctly, is definitely coming into a very old level of support that was tested multiple times during 2019 and 2020, and again even in early this year. It’s never really broken that line to any significance. It’s had a quick sell-off during the Covid crash, and another couple of spikes, but it really does tend to find support somewhere very close to $40.

It’s around $45 right now. So it would be interesting to see if this stock can hold that. It might even be good for a balance sometime in the next number of weeks if that low forties level can hold and see a rebound. So a lot of these stocks may still be in a downtrend but might have a rebound off of a support level for a short-term trade. Let’s take a look at a summary of what we just looked at. The only bullish stock in our 10 stock collective today has been EXAS. Remember the breakout. In fact, if I look back in time here and there’s the chart, you can see this Exact science, EXAS, broke out, and looks pretty darn good. So it looks like it’s broken the down tread.

This is the only chart in this entire group that holds any interest to me at this moment. I don’t own it. I’m not necessarily buying it, but I think it’s got an okay chart. It might be worth further exploration. The other ones are more on watch alert list, which is the Zoom, Square, Shopify, Beam, and CRSP. These stocks are coming into a pretty significant level of support. Each one of them. You just want to see those levels hold and you want to see, ideally a bounce off of them. The questionable stock is Tesla and if we go back to the chart, you’ll remember that Tesla maybe has a bit more downside to go, but there is a level of support from 2020 that will probably at least get a pause. So it’s worth keeping an eye on Tesla.

These five stocks here are a little bit more attractive. Tesla still has a little bit of downside to go, I think. And then the stocks we want to avoid. “Forget about it” as the movie Goodfellas, you’ve never seen it and you like mob movies, this is a great movie. They’re always saying, forgot about it. So I think these are three stocks we want to forget about. And that is TDOC, Roku, and PATH. All of these are on a screaming downtrend where there’s absolutely no sign of stoppage yet. So let’s just say, give those guys a pass. Forgot about it. I hope that this gives you some ideas about what to watch. And this may be an idea, if some of these stocks that are on our watch list there firm up, could be a sign of a trading opportunity. Not necessarily a buy-and-hold opportunity because I really don’t think that the interest rate environment is favorable to this group. When stocks get oversold, just like when they get overbought, they can move a bit. So, not saying that now is the time, but certainly something we should keep an eye on given the parameters that I’ve discussed today.

 

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