Apple Soars, Time to Buy Tech

04/22/2011 10:12 am EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

Standout earnings from tech giants like Apple and others could be the event that fuels a new uptrend for the sector and the overall markets. Here are some ideas for how to play it.

Just a few weeks ago, headlines like “Chip Stocks Weigh Down Tech Sector” were common with the sentiment on the sector so negative. The failure of the tech sector to surpass the early-March highs while other sectors were breaking out in early April made many cautious about the overall market, and especially so for the tech sector.

That all changed this week, as impressive earnings from many of the tech giants, including Apple Inc. (AAPL), Qualcomm (QCOM), and Western Digital Corp. (WDC) have given the entire sector a boost, which I feel is the start of a major new uptrend in the tech sector.

Though the tech-heavy Nasdaq 100 chart had been in a downtrend since the February highs, its Advance/Decline (A/D) line was acting much stronger than prices, as it made new highs in early April. This was one of the reasons that I was looking for the Nasdaq 100 to be “the best performer on the next rally.”

The upside breakout in the PowerShares QQQ Trust (QQQ) this week is a strong indication that the tech sector is ready to help boost the overall market to new highs for the year.

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Chart Analysis: The PowerShares QQQ Trust (QQQ) gapped through trend line resistance (line a) on Wednesday and added to the gains on Thursday. This reverses the prior pattern of lower highs and lower lows.

  • The 61.8% support level at $55.52 was hit on Monday’s panic selling, but QQQ reversed in the afternoon to close well off the lows

  • Now that the early-March highs have been exceeded, next resistance is at $59.04 and the February highs. The 127.2% retracement resistance level and next major target is at $60.61

  • The daily chart formation has targets in the $62 area with the major 50% resistance level from the 2000 highs at $70.05

  • The Nasdaq 100 A/D line has completed its bottom formation, line c, and should surpass the previous highs (line b) in the near future

  • Good support now stands in the $57-$57.60 area

Apple Inc. (AAPL) dropped through the support in the $326 area early Monday before reversing to close the day higher. This likely cleared out many weak longs and probably tempted some traders to get short.

  • AAPL has rallied over 7% from Monday’s lows, closing above the downtrend (line d). This suggests that AAPL will be able to move above the February highs at $364.50

  • The daily chart formation (lines d and e) has targets in the $385-$390 area

  • Volume has been very strong over the past two days and the daily on-balance volume (OBV) held its support at line g on Monday, which was a positive sign

  • Initial support now lies at $342-$346 with stronger support at $328-$332

NEXT: Latest on Sector ETF XLK; How to Play the Tech Rally

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The Select Sector SPDR - Technology (XLK) dropped slightly below the 50% support at $25.40 on Monday, but it acted strong the rest of the week, closing at $26.35. The next resistance is at $26.66 and then the February highs at $27.04.

  • The upper trend line on the weekly chart (line b) is now at $27.80 with the 2008 highs, line a, at $28.60

  • If the current rally in XLK matches or equals the rally from the 2009 lows to the 2010 highs, the 100% target is at $31.15

  • It was positive from an intermediate-term standpoint that the weekly OBV did confirm the February highs. The OBV is likely to move back above its weighted moving average (WMA) next week. Long-term OBV support stands at line e

  • The daily OBV (not shown) is positive, and there is good short-term support for XLK now at $25.70-$26, with weekly support, line c, at $24.70

What It Means: The technical action this week by many of the most prominent technology stocks and the Nasdaq 100 and its A/D line suggests that the tech sector is likely to provide the fuel to push the overall market to new highs for the year. With many portfolios underinvested in technology, there should be an area for new buying.

How to Profit
: Technology shares are especially sensitive to earnings, so while individual stocks are likely to do much better than the ETFs, they also carry larger risk. In the next week, I will be looking for tech stocks that either have already reported earnings or won’t do so for several weeks in order to find new buying candidates.

For exposure not only to technology, but also the surging biotech sector, the Powershares QQQ Trust (QQQ) looks attractive. Go 50% long at $57.82 and 50% at $57.24 with a stop at $54.90 (risk of approx. 4.6%).

For exposure only to the tech sector, I like the Select Sector SPDR - Technology (XLK). Go 50% long at $26.16 and 50% at $25.84 with a stop at $24.94 (risk of approx. 4.1%).

As for Apple (AAPL), it is a more difficult entry because when the stock takes off, it often doesn’t look back. I was originally looking for a drop to major support at $303-$306.90 to buy, but that no longer looks feasible. Aggressive traders can go long on a retest of the breakout at $344.70 with a stop at $327.30 (risk of approx. 5%).

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