Technology Portfolio Update

02/25/2011 10:50 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

I outpaced the market, but a look back reveals the importance of stop placement and diversification across a sector.

This week’s sharp stock market decline has hit some of the technology stocks hard, but as noted in this week’s Trading Lesson, the tech-heavy Nasdaq 100’s Advance/Decline line made significant new highs last week. The Nasdaq 100 closed higher on Thursday and may have formed a short-term low. So let’s revisit this tech stock portfolio and manage the active positions in order to control risk and lock in profits.

Seven stocks were recommended in mid January (see “Seven Tech Picks for 2011”), and of the seven, two orders were not filled, three were stopped out, and two are still left in the portfolio and doing well. The average loss for those that were stopped out was 9.6%, while the average gain for the two long positions is 29%. Overall, a $10,000 investment in each would show a net gain of 6% as of Thursday’s close (the S&P 500 returned just 1% during this time). Though these results aren’t too bad, I am not satisfied with just 40% winners. Let’s look at the remaining portfolio holdings.

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Chart Analysis: Micron Technology (MU) still has a very bullish chart, and since closing 2010 at $8.02, it has had a dramatic run to the upside.

The major 61.8% retracement resistance at $12.20 has been tested but not yet overcome. There is further resistance at $12.60 and then in the $14 area

  • So far, the current setback is holding above the first good chart and retracement support in the $10-$10.20 area
  • The 50% retracement support level is at $9.50
  • The weekly and daily on-balance volume (OBV) both confirmed the recent highs and show no signs of short- or intermediate-term tops
  • The daily OBV overcame strong resistance at line a in early January and preceded a breakout in prices.

SunPower Corporation (SPWRA) completed the reverse head-and-shoulders (H&S) bottom formation on February 7 when it closed at $15.74, which was well above the neckline (line b).

  • The upside target from the H&S bottom formation is in the $20-$21 area and SWPRA surged to $19.88 last week
  • There is strong weekly chart resistance starting at $21.70 and continuing up to the $26 level
  • The daily OBV broke through its downtrend in January, suggesting that accumulation was taking place
  • The weekly OBV also is strong and is confirming the price action
  • There is initial support at $17-$17.30 with much stronger support in the $15.80-$16.50 area

What It Means: The unexpected sharp pullback in the technology sector in late January clearly wreaked havoc with several of my recommendations for the technology portfolio, but that is why stops are critical. The losses were managed well in two of the positions (average loss of 7%), but the 15% downside hit in Rubicon Technology (RBCN) clearly hurt the bottom line. In hindsight, I was too optimistic on this position and my entry level and/or stop were not well placed. The portfolio performance to date clearly reinforces why it is so important to have a number of holdings when investing in a sector because it is unlikely that all will be winners.

How to Profit: As per the prior recommendation, longs in MU were established at $8.43, and I would now raise the stop on that position to $9.46.

On Tuesday, January 11, I recommended buying SPWRA at $14.08-$14.22 with a stop at $12.47. The low over the next two days was $13.82. On January 25, the stock surged to a high of $15.44 before reversing to close on the lows. This false breakout took SPWRA back to a low of $13.15. Even though I recommended raising the stop to $12.97 on a move above $14.84, the stop held. Would now raise the stop to $16.33 and sell half the position at $21.58.

In early February, we also recommended buying Intel Corp. (INTC) at $20.95-$21.35 with a stop at $19.95 (risk of approximately 6.5%). The rally in INTC appears to have failed below $22.30 as it has corrected sharply from the recent highs at $22.21. This has weakened the technical outlook. Raise the stop to $20.48 to limit the risk on this position, as the strength of the next rally in INTC will be important.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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