AI Stock Correction: Technical Indicators Signal More Downside Ahead, Despite Near-Term Bounce Potential

The dazzling rally in AI-related stocks, a significant driver of market upside, is showing signs of strain. Technical analysis suggests that the current correction in the AI sector may not be over, despite potential for short-term rebounds. The Global X Artificial Intelligence & Technology ETF (AIQ), a proxy for the AI theme, has experienced a notable downturn, retreating nearly 19% from its recent peak. This technical weakening presents a challenge for the sector in the current quarter.

Key technical indicators are flashing bearish signals. The weekly MACD has transitioned to a "sell" signal, indicating a bearish trend over the coming weeks and suggesting the correction is ongoing. Furthermore, weekly stochastics are trending lower, reflecting a loss of upside momentum after the ETF became technically extended in June. The AIQ's top holdings, including giants like SK Hynix, Micron, AMD, Apple, and NVIDIA, underscore its sensitivity to semiconductors, AI infrastructure, and mega-cap technology, making its movements a bellwether for the broader AI theme.

While the daily chart indicates a potential for near-term stabilization due to oversold conditions and the ETF testing support from the daily cloud model, this is likely to be a temporary interruption rather than the start of a new uptrend. The immediate downside pressure may ease, but the intermediate-term momentum on the weekly chart shows significant deterioration. Traders should view any near-term rebound as an opportunity to reduce exposure rather than a signal to increase it.

Immediate resistance is observed at the 50-day moving average and the daily cloud, in the $64-$65 range. A break below the cloud-based support near $57 would signal a reversal of the uptrend from the March low and increase the risk of a decline toward secondary support around $54. The relative performance of AIQ against the S&P 500 (SPX) also confirms a shift away from AI leadership. After a period of strong outperformance, the AIQ/SPX ratio has broken down, and while short-term stabilization is possible due to oversold conditions, the loss of momentum suggests further underperformance is likely this summer.

In conclusion, despite the long-term uptrend remaining intact for AIQ, the significant loss of intermediate-term momentum indicates vulnerability. Investors are advised to use any short-term stabilization as a chance to trim positions until momentum indicators show signs of improvement.