Eoin Treacy's view
How is cloud computing faring during the current period of heightened volatility? - Veteran subscribers will be familiar with our contention that despite the occasional euphoria associated with social media it is cloud computing that offers the best potential to be the "next big thing" from the perspective of a long-term investor in the technology sector.

Along with cutting-edge healthcare, shares related to the cloud computing sector have been among the best absolute performers on the Nasdaq for at least the last two years. As a reality check, if a technological development is to create shareholder value it needs to produce impressive earnings and create efficiencies that justify the expenditure on it. Cloud computing ticks both these boxes. I last performed a review of the relevant shares on June 28th.

Some of the most high profile companies in the sector such as Apple and Amazon have so far had relatively shallow pullbacks and still remain above their respective 200-day MAs. This is impressive against the background of concerted selling pressure across stock markets but a continuation of this relative strength is probably contingent on the wider market finding medium-term support soon and sustaining more than a short covering rally. This is an increasingly bear market environment and the potential for a lengthier consolidation and/or additional deterioration for these shares has increased substantially. This article from the Wall Street Journal highlights the increased competitive environment between these two leading companies in the cloud computing sector.

IBM had become somewhat overextended relative to its MA and has posted its largest pullback since late 2008 as it reverted towards that mean. The $160 area appears to be offering at least temporary respite but a clear upward dynamic and a successful retest of a low will be required to confirm a return to demand dominance. Check Point Software Technologies, Teradata Corp and Salesforce.com have relatively similar patterns.

BMC Software, EMC Corp, Citrix Systems, Cognizant Technology Solutions and Oracle Corp have had considerably deeper corrections to date. They are all oversold in the short-term and the potential for a short covering rally has increased. However, such has been the technical deterioration sustained that a significant period of support building will probably be required before investors will be convinced that demand has returned to medium-term dominance.

Google has been something of a laggard in the sector and has been largely rangebound for the last 18 months. It encountered resistance near $600 three weeks ago and is currently mid range. A sustained move above $600 would be required to confirm a return to medium-term demand dominance.

Juniper Networks failed to sustain the breakout from its base in March and extended its decline over the last three weeks. While oversold in the short term, a clear upward dynamic would be required to confirm at that at least temporary support has been found.

The evolution of cloud computing is unlikely to be overly impacted by sovereign debt issues in the USA and Europe. This sector remains ripe with potential. However a large number of shares have experienced considerable technical deterioration. From the perspective of medium to long-term investors, purchasing opportunities are beginning to present themselves. However, these shares will need to hold above their nadirs, once formed, to confirm medium-term lows. Until then, this is still a high risk environment.