Technology – Catch

Elliott Waves

Short Term

This time, we start from the bottom and work upward. The early-week advance followed by a sharp plunge at the end of the week invalidated all plausible impulsive structures to the upside, unless XLK eventually makes a new lower low below the November one. To make matters worse, the decline itself unfolded as a very clean impulse down. In this environment, only two paths stand out as most probable—and unfortunately, both are bearish.

Red scenario: The sector likely completed wave b of a larger corrective wave 2 and has started an impulsive move down for wave c. If the structure follows classical proportions, the decline would terminate in the red rectangle, forming a large bullish flag (abc) for wave 2. Ideally, this process would conclude sometime around the third week of February. The timing aligns well with the outlook discussed in the Nasdaq review for SPX, NQ, and RUT. The expected drawdown in this case would be around 10%.

Blue scenario: This would be the more damaging outcome. If the sector manages another strong push and records a new all-time high, the entire advance off the November low would likely qualify as an Ending Diagonal for wave v of 1. That structure would typically trigger a fast reversal back toward the November low, the origin of the diagonal. Such a move would likely represent only wave a of a much larger wave 2, implying losses of 20–25% or potentially more. This correction would likely extend over several months.

The potential implications of both paths are illustrated on the mid-term chart below.

Mid Term

CANDLES

The sector closed Friday with bearish candles on the monthly, weekly, and daily frames. As a result, the odds favor continued downside pressure and a downdrift into next week.

Now we should ask ourselves a key question. If Technology, Financials, Health Care, and Consumer Discretionary all closed January with bearish combinations of varying strength, what are the odds of a bearish February—or at least a bearish start to it—given that these four sectors account for roughly 67% of the market?

From a practical standpoint, and even through the lens of the Pareto principle, Technology alone would often be sufficient to drive such an outcome. When the largest weights are under coordinated pressure, the broader market rarely remains insulated for long.

Reference: S&P 500 Sector Weights — 2024 vs 2025

Summary

Technology sits squarely in a Catch-22. The sector closed January, the week, and the final session with bearish candles, while the latest decline unfolded in a clean impulsive manner. Early attempts to push higher failed decisively, leaving the sector trapped—unable to advance without increasing risk, yet vulnerable if it weakens further. When price action reaches this kind of stalemate, history rarely favors the bulls.

Structurally, the setup offers little comfort. Most bullish impulse scenarios have been invalidated, leaving two dominant paths—and both point lower. One implies a controlled pullback of roughly 10%, potentially forming a larger corrective flag. The other, more dangerous outcome involves a brief push higher followed by a sharp reversal, opening the door to a 20–25% decline over the coming months. In true Catch-22 fashion, neither path provides an easy escape.

With Technology joining Financials, Health Care, and Consumer Discretionary in closing January with bearish combinations—and these sectors accounting for roughly two-thirds of the market—the broader implications are hard to ignore. As the old saying goes, when the engine starts sputtering, the whole train slows down. For now, Technology remains under pressure, and February looks more likely to test patience than reward optimism.